That means that the risk/reward profile of holding on to a very equity-heavy portfolio as college approaches is less attractive. Similarly, my Model Bucket Portfolios include 40% equity exposure at the low end (for the Conservative portfolios) and nearly 60% at the high end, for the Aggressive versions.īy contrast, college funding has a much shorter duration of just four or five years or so. The typical target-date fund geared toward someone retiring in 2025 includes nearly 50% of its assets in equities, and target-date funds geared toward people who are already retired have an average of nearly 40% in stocks. If the portfolio is properly allocated, it would include safer assets that the retiree could spend through without having to touch stocks. Moreover, that's a sufficiently long holding period for stocks, which land in positive territory in rolling 10-year periods more than 90% of the time. For one thing, all but the wealthiest retirees need their portfolios to grow a bit in retirement, to outpace inflation at a minimum and ideally to do even better than that. With an anticipated 25- to 30-year time horizon for spending, it's only sensible that a retirement portfolio includes a healthy dose of stocks as retirement approaches. The duration of each spending period, especially, should influence each portfolio's asset allocation. But you have less than half that amount of time to amass the funds needed for college, and if all goes well, you'll spend down those assets quickly-in four years or so, or perhaps a few more if the student is on the “five-year plan” or you're also footing the bill for graduate school. You might save for retirement for 40 years or more and be retired for another 25 or 30 years or even longer. One of the key differences right out of the box is duration-of both the savings period and the spend-down. Investors are betting that stocks will continue to deliver, but high valuations leave less room for error.ĭifferent Spending Horizons, Different Glide Paths To help illustrate the importance of approaching asset allocation differently for shorter-term goals, let's contrast a retirement portfolio with one geared toward another major goal for many families: college savings. equity valuations are on the steep side, exacerbating the risks for investors who hold stock-heavy portfolios for goals that are close at hand. That could impart a false sense of security especially among younger investors who didn’t experience 2000-02 or 2007-09. Although stocks crashed in the first quarter of 2020, they've since regained ground and then some. For one thing, the market has been strong for a long period of time and extended downdrafts have been exceedingly rare. This issue could be an underappreciated risk for many investors right now. For shorter-term goals, the downside of being too aggressive at the wrong time is even greater than would be the case for a too-aggressive retirement portfolio. That’s because the vast majority of financial goals besides retirement are either one and done (for example, making a down payment on a home) or paid for over a limited time horizon, such as college. What gets less play, however, is that de-risking is even more urgent if you’re saving for nonretirement goals, especially if your spending date is close at hand. What retirement researchers call sequence risk-encountering a bear market early on in retirement-can lead retirees to prematurely deplete their assets, especially if the retiree overspends during the market shock. If you're approaching or in retirement, it's a good bet that you've heard about the importance of reducing risk in your portfolio.
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