Rebalancing Your Pandemic Portfolio

Tuesday, September 22, 2020

Original article from Fuoco.com >

Portfolio rebalancing according to your age and goals is really all about asset allocation. At different stages in your life your financial concerns shift, and so you look for your investment portfolio to shift too - from growth to income - as you get older. During these pandemic times, with market volatility, your risk tolerance will also come into play.

Investors at Age 25

Should young investors place a high percentage of their money in stocks? At age 25-35 it would seem so, since you have a long time before retirement and good stocks do tend to perform long term. But asset allocation is influenced by more than your age, it also depends on your risk tolerance. If stock market plunges during the pandemic cause you to panic, you have a lower risk tolerance than someone who would see that same market plunge as a buying opportunity.

Studies abound about the long term performance of hypothetical portfolios invested 80% in stocks, 20% in bonds, or 70% in stocks and 30% in bonds, vs what a 60/40 investor would have earned, and the studies show minimal differences. What the studies are really telling us is that the most important thing is to invest in something tried and true, not something which is still considered highly speculative like Bitcoin.

At the end of the day an investment strategy that leaves you comfortable with the amount of risk you’re taking, and is diversified enough to help you stay on course during pandemic volatility and market corrections, is the best financial plan for you. So although you are 25-35 years old and keep hearing that you should be invested 80% in stocks, if you’re only comfortable with 50% in stocks and want to keep the other 50% in bonds, that’s fine. Just be sure to monitor your situation semi-annually (at a minimum), and communicate with your financial advisor when you believe you are ready for a change.

Be sure to take advantage of any retirement plans that are available through your employer. Many have a matching contribution, and over time the power of compounding does the heavy lifting of increasing your nest egg. Saving via direct payroll deduction makes it almost painless.

Investors at Age 45

As you mature and start climbing up the corporate ladder, maybe get married, have kids, buy a house, even come into an inheritance from a parent or grandparent, events in your life will drive decisions and begin to have an impact on your investment strategy. You now have a family to protect, kids to send to college, and maybe a business idea you want to invest in. How do you make those goals and dreams a reality? Having more money to invest may lead you down the path to a more conservative allocation, but think again. Now you may not need to take on as much risk to achieve growth, but you may want to depending on how close you are to achieving your financial goals. That is why financial planning and identifying goals is so important early on, and then revisiting them periodically to see how you are progressing is imperative.

Whether you inherit assets or stocks, you have to decide how to fit them into your current portfolio and if you need to rebalance. Inheriting stocks might mean you need to sell off some stocks in order to buy bonds. If particular assets are handed down, consider if those are things you would buy with your own money. Should you keep them? When you inherit cash, the money can be used to purchase both stocks and bonds, or to invest in another financial vehicle.

Set up a 529 plan, which is a tax-advantaged account that helps you save money for college and other education expenses. When your kids are young, an aggressive asset allocation with a high percentage of stocks makes sense. As your kids get closer to college age, your asset allocation should be more conservative. The plan’s value needs to become more stable over time so you’ll be able to withdraw money for your child’s education when you need it. Age-based 529 plans are popular and act like target-date retirement funds, but they have a shorter time horizon associated with sending kids to college.

Also at age 45 - 55, if you’ve been highly successful, watched your spending carefully, and been serious about saving, you might be on track to invest in a business idea or even decide to retire early. If instead of growth you are now thinking about income, it may be the signal to rebalance toward a more conservative asset allocation. How you feel about stock ownership during retirement boils down to your risk tolerance, which incidentally may have changed during these times of economic uncertainty due to the pandemic and looming recession ahead.

Fast forward to about 10 years away from retirement, and your portfolio is in the transition stage. You might be thinking about moving toward an asset allocation that’s more heavily bonds than stocks. But remember you still need some growth so you don’t outlive your portfolio $$$. Instead of moving toward the 40% bond, 60% stock asset allocation that might be recommended for someone planning to retire shortly, you might consider a move toward a 50/50 allocation.

Investors at Age 65

Age 65 certainly no longer represents the early years of retirement for most people who are healthy and want to keep a focus in their lives and get deep satisfaction from their career. Many who can afford to retire, now choose to work for fulfillment, or to beef up their retirement nest egg even more so as not to have to compromise their lifestyle. By age 70-75 though, you might start to think about withdrawing retirement account assets for income, earlier if you have lost your job due to the pandemic and have decided not to return to work due to the threat to your health.

Rebalancing your portfolio in your sunset years could mean gradually selling stocks to move your portfolio towards bonds for safety. Be wary of selling stocks at a loss. The investments you sell for income should be what you can sell for a profit. Being diversified gives you a better chance of always having assets to sell at a profit. Look at each major asset class with your financial advisor; you may want to hold both large-cap and small-cap stock funds, both international and domestic stock funds, and both government and corporate bonds!

Draft a retirement withdrawal strategy to put in place, and don’t forget to account for inflation. Portfolio rebalancing will require a different approach when you are taking regular withdrawals, as opposed to making mostly contributions. Also keep in mind your required minimum distributions (RMDs) from 401(k)s and traditional IRAs will eventually kick in. The CARES Act has those on hiatus for now, you may want to read our prior article: RMDs For 2020 Waived For Retirees.

When you take RMDs, you can rebalance your portfolio by selling an overweight asset class. Keep in mind that you’ll be paying taxes on withdrawals of earnings and pre-tax contributions unless it’s a Roth account. People with significant assets outside of retirement accounts can rebalance in a low-cost, tax-efficient way by gifting appreciated investments to charity or gifting stock shares with large capital gains to family members.

CONTACT US: Get educated about the potential impact of life changes and investment decisions on your portfolio and income. No matter what your age, our TFG financial advisory team will work with you to help you build a tax–efficient, well-diversified portfolio, allocated and tailored to your risk profile. Feel free to contact me, Cory Lyon, Financial Advisor, directly at 561-209-1120, with any questions regarding financial planning. TFG Financial Advisors offers a complimentary, no obligation, 360 degree portfolio audit to help you assess where you stand and what opportunities may exist. At TFG, we believe in customized investment portfolio design and personalized asset management. I act as a fiduciary for my clients.

TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.