Traditionally, investors are advised to minimize their stock market risk as they grow older, yet many seem to be doing the opposite.

Evaluating your risk in the stock market is essential. Recent findings shed light on this issue in an unexpected way. Data shows that around 25% of investors aged 75 to 84, and 20% of those above 85, have nearly all their investments in stocks. This contradicts conventional wisdom that retirees should limit their stock holdings to no more than 50%, or even less, based on their risk tolerance. The rationale is that as retirement approaches, it’s prudent to shift to safer investments to mitigate potential losses right before retirement.

So, what insights does this study provide regarding our risk exposure, and where does the conventional approach stand?

Many retirees may not realize that their risk tolerance has evolved, according to Stacy Francis, Certified Financial Planner and CEO of a financial planning firm. "We’ve observed a significant increase in equity ownership among individuals due to a decade-long bull market. Many simply set their investments and forget them," Francis explains. This means many might not be reassessing their stock and bond allocations regularly. Since stocks have outperformed bonds, investors may find themselves unintentionally taking on more risk than intended.

When Is It Time to Rebalance Your Portfolio?

The short answer? Twice a year, as recommended by Vanguard. Establishing a biannual schedule—treating it like a routine dental check-up—is ideal. Mark your calendar for January and July. If it’s been a while since your last portfolio review, now’s the moment.

“This is vital,” Francis states, “as it removes market timing from the equation and fosters a systematic approach for reviewing and rebalancing your investments, ensuring you align with your intended risk allocation.” Those who adhere to this practice tend to outperform over time.

What Constitutes the Right Balance vs. Excessive Risk?

Experiencing anxiety or distress upon hearing negative financial news indicates you may be taking on too much risk, Francis suggests. If fluctuations in your portfolio cause significant concern, it’s time to reassess.

In recent years, the persistent surge in stock prices coupled with low bond yields has complicated rebalancing efforts. Many investors worry about missing out on profits. For retirees, an 80/20 stock-to-bond ratio is too aggressive, according to Francis. She recommends shifting to a 50/50 balance by age 60, while those in their 50s still earning an income might consider a 60/40 split.

Everyone’s risk tolerance varies. Some investors may feel compelled to take on more risk to catch up on savings, which can be a perilous strategy. Instead, consider saving a bit more, cutting back on spending, or extending your work life.

Determining Your Risk Profile

The risk you and your partner undertake with investments should be assessed holistically for your entire household, not just one specific account, explains Jack VanDerhei, Director of Retirement Studies at a prominent financial services firm.

Understanding your comfort level with risk requires a comprehensive view of your financial situation. It’s wise to consult a financial advisor who can help you evaluate your unique mix of assets and liabilities. General rules of thumb may not accurately represent your personal risk landscape.

If you’re considering that study and thinking you should increase your risk, note that it focused on discretionary brokerage accounts, not retirement accounts like 401(k)s and IRAs. This underscores that someone else’s risk tolerance should not dictate your own.

Addressing the Fear of Outliving Your Funds

Many retirees take on additional risk to ensure their money lasts. Rising inflation has hit many hard, especially those on fixed incomes, prompting some to gamble on riskier investments.

Fortunately, those still in the workforce have options. “Financial advisers often stress that the most effective way to enhance your retirement portfolio is to boost savings,” Francis explains. “This approach gives you direct control over your portfolio's growth. Most people benefit from a combination of increased savings and a slight increase in stock exposure.”

Working longer can also be a powerful strategy for soon-to-be retirees. Francis observes that more clients are not fully retiring, differing from the retirement models of previous generations. Today’s retirees often engage in consulting, writing, or part-time work.

We’ll explore the benefits of working longer and increasing savings in an upcoming newsletter—join us for insights!