After a multi-year bull run in the U.S. equities market, many investors have tilted their retirement portfolios toward stocks to chase the returns. However, investors should still rebalance their stock, bonds and exchange traded fund allocations to manage risks.
According to Fidelity Investments, the ix year bull market in U.S. stocks have exposed many older workers to more equity risk in their portfolio than they realize and more than recommended for their age, reports Suzanne Woolley for Bloomberg.
Fidelity, which administers 401k(k) plans for 21,661 employers with 13.4 million people, found 14% of participants ages 55 to 59 with stock allocations of at least 10 percentage points above what is recommended. For those ages 50 to 54, portfolios diverged by 18 percentage points of what is recommended. [Why Retirees Should Use ETFs in a Balanced Investment Portfolio]
The long bull market “gives this false sense of continued prosperity,” Douglas Fisher, senior vice president of workplace retirement policy at Fidelity, told Bloomberg. It brings about “this wealth effect that happened with our homes before 2008, when we felt like we could use the home as an ATM. It’s happened a little in the 401(k) market, where people are taking out more loans—and taking money out just because of the increase in the market.”
Stock ETFs have also been garnering the lion’s share of new asset inflows, which may leave many investors exposed to a potential correction in the equities market. According to BlackRock data, equity ETFs attracted $70.6 billion in net inflows year-to-date through June after bringing in $190.2 billion in 2014. Meanwhile, fixed-income ETFs added $14.3 billion over the first six months of the year and $52.2 billion in 2014.
Fisher also pointed out that over the past year, contributions have accounted for 53% of he change in balances while the market effect was 47%.
“That tells me we’re in a volatile market,” Fisher told CNBC.
Consequently, investors nearing retirement age should begin thinking about their risk exposure to a long up-trending stock market.
Traditionally, young workers would heavily tilt toward stocks and gradually diminish equity exposure in favor of more conservative fixed-income assets when nearing retirement age. For instance, according to Fidelity’s target-date funds, a 50 year old who will retire in 17 years would have a stock allocation of about 84%, with 59% U.S. stocks and 25% international stocks. Meanwhile, a 59 year old would have 70% stocks, with 49% U.S. and 21% international. [ETF Investors Shouldn’t Overlook Rebalancing]
While it is fun to ride the stock market bull rally, people in their 50s should reassess asset allocation to diminish the negative impact of a market downturn, especially as one nears retirement age.
“What happens if [the market]corrects?” Fisher warned.
For more information on investing toward retirement, visit our retirement category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.