Monday, September 11, 2023

There’s a rule of thumb to figure out how much stock you should own: subtract your age from 100 and the answer is the percentage of stocks that should be in your portfolio. Say you’re 60 years old, that means your portfolio should be about 40% stocks and the rest in less volatile holdings.

The reason behind this is when you’re younger, you can afford to wait out the bad times. You can even invest more to grow your nest egg. But as you age, your focus shifts from growing your wealth to preserving it (or at least it should). With less time to recover, you want to hang on to what you’ve built.

A recent Wall Street Journal article revealed how many of America’s retirees are investing more like they’re 30. These folks abandoned the aforementioned rule of thumb in search of big returns.

Nearly half of Vanguard 401(k) investors 55 and older who are actively managing their money had more than 70% of their portfolio in stocks. In 2011, only 38% had 70% in stocks. At Fidelity, nearly four in 10 investors aged 65-69 had about 67% of their portfolios in stock.

And it’s not just baby boomers. In Vanguard’s taxable brokerage accounts, 20% of investors aged 85 and older had nearly all their money in stocks, which is up from 16% in 2012.

Why are people taking all this risk?

Savers haven’t had a place for cash since 2008, when the Federal Reserve first took interest rates to 0%. Since then, it’s been risk on. So, retirees ditched bonds and cash for stocks.

It’s yet another way the Fed has warped everybody’s mindsets. It produced a “bubble mentality” that turns everyday people into speculators rather than long-term investors.