Despite the recent gains on Wall Street, stock market values, as measured by the broad Wilshire 5000 index, remain nearly 40 percent below their October 2007 peak. For retirees hurt by those losses, getting back on the investing horse may be very hard. Many experts say stocks should still be a major component in most retirement portfolios, which should be adjusted as investors approach and move into retirement. This shifting mix of equities, bonds, and other holdings is known as the retirement "glide path." Here's some advice to help you determine the best glide path for you.
[Also see: Should You Manage Your Own Portfolio?]
There is no right answer. Financial advisers traditionally recommended that investors subtract their age from 100 and use the answer as the percentage that stocks should represent in their retirement portfolio. So, a 60-year-old would be 40 percent invested in stocks, a 70-year-old would have 30 percent, and so on. John C. Bogle, founder of the Vanguard Group, holds this view, and, having turned 80 last month, he was a lot better off in 2008 than the holder of a typical Vanguard retirement fund. Because of increases in life expectancies, the prevailing advice from money managers is that portfolios should be more heavily weighted toward stocks, even for people in their 70s and 80s.
Today, with stocks slowly moving up from bear-market levels, these fund managers say, going light on equities in a portfolio is a sure way to miss expected gains from a recovery. After last year's market declines, T. Rowe Price revisited its retirement fund assumptions and came away with a renewed support for the role of equities in a portfolio. "The study reaffirms that adequate exposure to equities has been the best way to meet the financial challenges posed by a potentially long retirement," the firm said in a recent newsletter. Charles Schwab, on the other hand, recently reduced the equity weightings in its retirement funds and wrote in a press release that its account holders supported the move toward more conservative investment practices.
Understand your current glide path. Determine how much of your portfolio is invested in stocks, and check once every three months. Here are some benchmarks: Fidelity Investments, which manages more than 17,500 employer retirement plans with 11.3 million investors, found that during the first quarter of this year, nearly 70 percent of the new money coming into these plans was flowing into stocks. That's down from 75 percent from the first quarter of 2007. Looking at the different age brackets of participants, here are the first-quarter breakdowns of equities in Fidelity portfolios: 77 percent for those ages 25 to 29, 76 percent for ages 35 to 39, 70 percent for ages 45 to 49, 59 percent for ages 55 to 59, and 53 percent for ages 60 to 64.
Look at how the professionals do it. The major retirement-fund companies have rosters of target-date funds that are designed to automatically shift glide paths as investors age. The funds were developed as default choices inside employee retirement plans. Investors just pick their planned retirement year, and the fund does the rest. However, target-date funds came under fire after they suffered steep market losses in 2008, as funds designed for 2010 retirees lost 25 percent of their value. Most target-date funds, however, have not shifted their equity mixes and continue to gain traction inside retirement plans.
Vanguard offers a useful Web tool that illustrates the changing glide path of its individual target-date funds as well as current performance information. John Ameriks, head of Vanguard's investment counseling and research group, says the funds performed as advertised last year. "Older investors who owned these funds were better protected than younger investors," he says, adding that beyond the equity mix, diversification in the types of investment holdings also provided a cushion. "But it wasn't magic. Some people expect it to protect them from losses, but it doesn't do that. The problem here is really the markets; it's not target-date funds. Unfortunately, people have lost money, and people are not happy about that."
Jonathan Shelon is the portfolio manager for Fidelity's family of target-date funds, known as Freedom Funds. The 2050 fund is 90 percent invested in equities, he notes, and the percentage decreases in each successive five-year period. The 2010 fund, for example, is 50 percent invested in equities. Shelon says that all of the funds are designed to roll over into an income fund 15 years after the target date is reached and that the income fund holds only 20 percent of its assets in equities. Even including the bear market, he notes, Fidelity's 2010 fund has averaged 5 percent annual gains in its 12-year history, and that's precisely what it was designed to do.
[Also see 4 Myths About Target-Date Funds.]
Implement your shifts in stages. As with portfolio rebalancing, any major change in your holdings—in mutual funds as well as individual stocks—should be made in stages. By spacing out your trades, you'll guard against the risk that you would be buying or selling equities at a bad point in a market cycle. And if you're not comfortable with the equity weighting in the target-date fund aligned with your retirement plans, you can easily shift into another target-date fund that better matches your personal risk profile.
Act. "The average 401(k) investor is not as engaged as we would like them to be," says Michael Doshier, Fidelity's vice president for workplace investing. He notes that only 1 in 7 Fidelity plan participants rebalances a portfolio in any given year. The bottom line: Many people are more likely to tune up their cars than their retirement portfolios. Don't be one of them.