Christine Benz of Morningstar.
Is it too late to de-risk? Christine Benz, Morningstar's director of personal finance, tackles this question in a new column. It's a subject on many client minds as stock market volatility grows and many portfolios drop in value. She reviews five questions investors should ask — or review with advisors — as there are many ways to come to that decision.
In the piece, Is it Too Late to Derisk?, Benz says — especially for those who are skewed heavily toward equities — the decision becomes "if they should leave their investments in place to recover or take steps to reduce risk in their portfolios."
"There aren't any one-size-fits-all answers," she says, and it depends on many factors including time horizon to retirement. Here are five questions she explores.
1. How soon until your client begins spending?
This is the big question, and clients who are 10 years or so away from retirement don't necessarily need to make any changes to be more conservative. "After all, the return potential of bonds and cash is very low, given today's low starting yields, so the less return you need to surrender to obtain peace of mind, the better," she writes.
However, those within two to five years from retirement might be more at risk, especially if they are heavily skewed to stocks, and that might call for "taking steps to cut back on risky investment soon, even if it feels late in the game." History does show stocks are likely to recover, she says, but it could take awhile. Since the 1920s, bear markets have lasted six months to three years. Further, stocks could drop further.
2. How flexible is a client's retirement date and spending plan?
Do your clients have to retire in two years, or could it be more? Their flexibility is a big factor, and less "wiggle room" may make de-risking more urgent. But if a client can delay retirement, it gives the market (and their portfolio) more time to recover.
