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The Rise of 'Extreme' Retirement Portfolios

Five years after the start of the Great Recession, some would-be retirees still need help managing their asset allocation properly
 

By Glenn Ruffenach | MarketWatch | August 25, 2014

The downturn of 2008-2009 taught investors a number of lessons about their nest eggs. Among the most painful: the all-important connection between risk and return (if you want high returns from stocks, you must be willing to shoulder the attendant risk) and the danger, for adults in their 50s and 60s in particular, of stock-heavy portfolios.
 
A good rule of thumb is that the fixed-income portion of your portfolio should equal your age. In 2007, on the eve of the market meltdown, almost half of workers ages 56 to 65 had 70 percent or more of their 401(k) funds in stocks, according to the nonprofit Employee Benefit Research Institute (EBRI). That asset mix, of course, proved to be a recipe for disaster.
 
Making the Same Investment Mistake Again

Now, a new study from EBRI indicates that some older investors today could be making the same mistake when it comes to asset allocation.
 
The research, titled “IRA Asset Allocation, 2011,” looks at the mix of equities, bonds, cash and alternative investments in Americans’ Individual Retirement Accounts. Such accounts represent 25 percent of all retirement assets in the country.

(MORE: Managing Your IRA)
 
On the surface, the numbers don’t look especially troubling: The average account holder has 44.4 percent of his assets in equities, 10.7 percent in balanced funds, 18 percent in bonds, 13 percent in cash and 13.8 percent in other assets. Among individuals ages 55 to 64 — those investors approaching retirement — the numbers are almost identical: 44.6 percent in equities, 10.8 percent in balanced funds, 17.2 percent in bonds, 13.5 percent in cash and 13.9 percent in other assets.
 
Worrisome 'Extreme' Allocations

But the study goes on to look at “extreme” allocations, defined as having less than 10 percent or more than 90 percent in a particular asset category. And here, some of the numbers are more worrisome.
 
Among account holders ages 55 to 64, more than one in four (29 percent) had over 90 percent of their holdings in equities. (Equities include the equity portion from balanced funds, as well as directly-held stocks, equity mutual funds and other equity products.) Conversely, almost one in five (18.3 percent) account holders ages 55 to 64 had more than 90 percent of their holdings in bonds and cash (including money-market mutual funds and certificates of deposit), a mix that many financial advisers would consider overly conservative.

(MORE: The 'Safety First' Guide to Retirement Withdrawals)
 
The findings are similar to a report last December from EBRI, which looked at asset allocations in 401(k)s. Among plan participants in their 50s, one in four (24.7 percent) had more than 80 percent of their holdings in equities; 30.5 percent had between 60 percent and 80 percent of their holdings in equities.
 
Yes, the stock markets since 2009 have been good to those individuals who never bailed out of equities when the recession hit. But if you find yourself today with an extreme allocation, or something close to it, don’t forget the financial lessons of 2008-2009.

This article originally appeared on MarketWatch. Glenn Ruffenach is News Editor at The Wall Street Journal, responsible for the Journal’s coverage of retirement finances and retirement planning.