With the US presidential election just a week away, many investors are concerned about how the outcome will affect their financial health.
Kristin Benz, director of personal finance and retirement planning at Morningstar, urges people to avoid making major changes to their retirement investment strategies during an election year.
In a conversation with Investopedia, Benz also talked about not blindly following rules of thumb in retirement. These rules, such as the 4% rule and the 60/40 portfolio, are considered part of traditional retirement investing wisdom and are a good starting point, but they may not be right for everyone. there is no. Both of these rules have recently come under fire for various reasons, but the 60/40 portfolio was reinstated in 2022 after suffering losses.
Below are excerpts from the conversation. Edited for brevity and clarity.
Investopedia: With the election and uncertainty surrounding whether the economy will slip into recession, should people change the way they invest for retirement? If so, how?
Probably not. I often take a strategic approach to asset allocation, with an initial focus on stocks. Because they can afford to take risks. Then, gradually add more bonds as you get closer to retirement.
I (also) don’t react much to what’s going on in the market, except for rebalancing when the position of an asset class exposure changes. I would urge people to stay away from changing the components of their portfolio based on expectations of what will happen with the election, the economy, or anything else.
Investopedia: Conventional wisdom says that you should be more into stocks when you’re young and rely more on bonds as you get older. What do you think about the 60/40 portfolio? Do you think it’s still an important benchmark?
Perhaps too conservative for people who have decades until retirement.
Young investors should have a more aggressive portfolio. Because if you don’t need the money right away, you can afford to endure the volatility that comes with a long-term portfolio.
For those nearing retirement, I like the idea of creating an asset allocation mix based on your situation…maybe 2 years worth of portfolio withdrawals in cash investments, then another 5-8. Yearly worth of high-quality fixed investments. income. If you do the math, it’s basically a 60/40 portfolio.
Investopedia: Is that allocation of cash and bonds based on how long it takes to weather a market downturn?
that’s right. If you look at stock performance over a 10-year period (in market history), stocks will be profitable about 90% of the time. If you shrink that period to five or three years, stock prices become less reliable.
So if you have a two-year time horizon, the only asset that is guaranteed to be profitable in such a short period of time is cash. There is some inflation risk, but because the holding period is short, it’s not that big of a problem.
And from there, kind of stepping into the risk spectrum, a high-quality short-term and intermediate-term bond portfolio can be very reliable over a five- to 10-year period.
Investopedia: In my recent book, How to Retire: 20 Lessons for a Happy, Successful, and Wealthy Retirement, I talk about the 4% rule. What role do you currently play in the plan?
I think this is a good starting point for anyone trying to determine if they have enough money to retire. The basic question (for retirees) should be, “Will adding 4% of my investment portfolio to Social Security get me closer to my planned spending goals?”
Ideally, add more nuance. Research shows that people generally don’t spend the same amount, adjusted for inflation, in retirement. People tend to spend the most in their early years, and then their spending tends to decline throughout much of their retirement years. Some people end up paying for long-term care later in life.
If there is a loss in my portfolio, I reduce my spending. The reason is that you leave more of your portfolio to recover when the market goes down…something you could spend more on in the good years if you want to reduce the bad times.
