'In General' May Not Apply to You

By Gary Silverman, CFP®

In my files I have a stack of articles that talk about common mistakes made by retirees. Several included a guideline to determine what percentage of stocks should be in your portfolio.

Depending on the author, they say that investors should subtract their age from either 120, 110 or 100, and the resulting number will give you the percentage. So, based on this idea, all 60-year-olds should have between 40% and 60% of their portfolios invested in stocks.

While this is a good starting point for discussion, in the real world this may not be close to the truth for you.

Just because you are of a certain age, does that mean you will react in a certain way? A general rule is exactly that — a generalization. It doesn’t consider the emotions of the people involved. What happens when the market drops 20, 30 or even 55%?

Some people with over half of their portfolio in stocks may panic and start selling because they just can’t stomach watching those losses. Their tolerance to market volatility is so low that emotions overshadow logic.

That is one reason it takes more than simple formulas to build portfolios. An individual’s tolerance for risk should be considered. At my firm, we run a risk analysis of our clients, but more importantly we also get to know our clients.

What have they done financially in the past? Based on what is happening in their lives right now, how are they likely to react to their portfolios gaining or dropping? And then there are the intangibles that often can only be discerned by listening to them and then my gut.

You should do the same when looking at your own financial situation. Don’t rely on thumb rules or articles you read (including this one). Your dream retirement may cost less than that of your neighbor’s. You might be 60 years old and are looking at a large withdrawal for the RV and houseboat you and your spouse will use for your dream retirement in seven years.

Or you might be paying for a college education for your 10-year-old granddaughter. Or you may be retired, living on your Social Security and pension and don’t see a need for using any of that old 401(k) money.

All other things being equal, I’d use three very different levels of stocks in their portfolios. Albeit all other things are never equal.

People’s lives take many different paths. Don’t assume your road to retirement can be calculated with formulas and guidelines that work 'in general.'