Financial Opinion and Insights

Too Much Stock?

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

The Putnam Institute released a study recently that reached a conclusion that will surprise many clients – and advisors, too!  According to their research, the optimal equity allocation for a retiree’s portfolio is about 10%!   Huh?

They did say that, depending on various factors, the optimal equity allocation could be as high as 25%.  Is this surprising?

Well, maybe and maybe not.   While most academics and advisors consider longevity or inflation to be investors’ biggest risks – a position I have taken many times, as well – the biggest risk, according to the study, is `sequence of return’ risk!  This is an issue that particularly affects investors who are withdrawing money in retirement.  

Actually, this is an issue I addressed in my live program, and paper by the same name, “Why Most Retirement Plans Will Probably Fail.   For those who need retirement income from their investment portfolio, sequence of return is, indeed, a bigger risk than the raw average annual return number itself!

Let’s face it, three different investments might boast an attractive annual average return rate; but it pays to look at just how those returns were achieved.  Some might provide a smoother ride than others, but not usually.  Remember, it’s true:  Past performance is NOT a predictor of future success.  If it were, winners would be easy to spot and everyone would be rich!

So, how do you reduce volatility and increase your chances of reaching your retirement goals?  Here’s your two-step answer: 

(1)  Make sure you have an asset allocation that’s optimized for your needs, resources, and risk profile; and,

(2)  Keep an eye on your costs.  

Portfolio volatility is controlled through asset allocation, not investment selection.  Often, an investor will think his portfolio is diversified only to find out it’s really concentrated.   Diversification is about correlation, not sectors.  If you’re not sure what that means, talk to your advisor.  Don’t mistake duplication for diversification. 

As for costs, it doesn’t make sense to pay extra; but, it also doesn’t make sense to be penny-wise and pound foolish.  I’ll never forget the story about the investor who wanted to avoid 1% in advisor fees only to lose 40% of his portfolio value because his portfolio was too heavily concentrated in his favorite stock when the market turned on him.   He’ll go to his grave thinking an advisor couldn’t have done better when, in truth, few could have done worse – and the proper asset allocation would almost certainly done far better.

As you can see, proper allocation and portfolio efficiency are two important keys to your success.  If you haven’t had a `portfolio stress-test’, call your advisor for a checkup.




Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any secrity or the services of any person or organization