Sam Swenson, CFA, CPA, Author at The Motley Fool Australia

How to think about risky stocks when you're approaching retirement

Sam Swenson, CFA, CPA — Mon, 26 Sep 2022 04:15:00 +0000

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Retiring into a potential recession isn't what anyone would want, but there are ways to maintain some control over your portfolio in times of economic decline. Making some big-picture adjustments to your investments in the years leading up to retirement can pay big dividends down the line, all while creating additional security for your spending plan.Â

Let's think further about how you can protect yourself if you're feeling some anxiety leading into your senior years.

The threat of sequence risk

The goal for most people during their working careers is to accumulate wealth. In the years leading up to retirement, the goal tends to center around preserving wealth.

Since we can reasonably estimate that the economy could be headed for some difficult years, modifying your strategy going into retirement is even more necessary. Further, given the vast number of variables that go into retirement planning (i.e., how long you think you'll live, how much you expect to spend, etc.), it's important to create certainty around money to the extent possible.Â

One of the less commonly discussed topics in retirement planning is sequence risk (sometimes called "sequence-of-returns risk"). Put simply, sequence risk is the potential for running into a poor string of returns in the years after you stop working, which can then lead to portfolio failure in the long run.

In other words, if you experience steep portfolio declines in the early years of retirement -- when you've already started drawing on the money to cover living expenses -- you run a higher risk of running out of money than if you were to retire into a bull market.Â

Addressing sequence risk

For example, say you maintained an 80% stock/20% bond asset allocation throughout your working career. Given the raging bull market of the 2010s, this allocation performed particularly well.

However, if retirement is on the horizon, you might think about briefly moving to a 20% stock/80% bond asset allocation. Rethinking your asset allocation can help shield against the threat of poor returns in the early years of retirement, which present a substantial threat to retirement success.

The easiest way to go about handling sequence risk is by increasing your share of lower-risk investments (like bonds and cash), relative to stocks. As 2022 has shown us thus far, bonds are not entirely risk free, but they do generally come with a lower risk of extreme drawdown -- especially relative to stock investments. Even though you might not get big returns out of bonds, they do exist as a valuable risk-control measure that offer at least some diversification benefit.Â

A numerical example

Say you started your retirement in 2022 with a $500,000 portfolio and an 80% stock/20% bond asset allocation. After the stock market lost 20% and the bond market lost 10%, you'd be left with $410,000. From there, you'd have to withdraw money for expenses, which could have a deleterious effect on the long-run viability of your portfolio.

In an alternative world, imagine you started with the same $500,000 portfolio but a more conservative 20% stock/80% bond asset allocation. In this example, after the stock market again lost 20% and the bond market lost 10%, you'd be left with $440,000. This is still a loss, but an improvement from the riskier portfolio used in the first scenario.

While this is by no means a way to shield your portfolio completely, it does provide some cushion in the event stocks continue their slide for the next few years.

Retiring isn't easy but possible

The reality remains that retirement is a financially challenging milestone for the grand majority of workers. But between Social Security, personal savings, and (increasingly) active income, retirement is absolutely achievable.

As you get closer to retirement, consider the risks at hand and the magnitude of stock market loss you'd be willing to tolerate. From there, adjust your overall asset allocation as necessary, but also be sure to keep a healthy cash reserve on hand.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post How to think about risky stocks when you're approaching retirement appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Should you really be investing in the stock market right now?

Sam Swenson, CFA, CPA — Wed, 21 Jul 2021 00:11:00 +0000

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

You might be wondering if investing when the stock market is at or near its all-time high is a good idea. Before you decide, it's worth considering two factors: your risk tolerance and your investment time horizon. It's also worth looking at what has resulted from investing at previous all-time highs. Historically speaking, there has rarely been a bad time to put money to work assuming it's money geared for long-term investing. Here, we'll go over some of the most important factors in deciding whether you should really be investing in the stock market right now.

Your risk tolerance

Some people have an insatiable tolerance for investment risk: No amount of bitcoinÂ tokens or GameStop stock is enough. For others, it's quite the opposite. No matter the type of investor you are, you should be evaluating risk from the standpoint of your total portfolio. That is, you should consider your entire financial situation and then assign risk from there. Next, realize that there are two key attributes of risk tolerance: your ability to take risk and your willingness to take risk. You might be a multimillionaire with an above-average ability to take risk, but you might not have the willingness to do so because you don't feel there's much to be gained as a result. In another case, you might have a very high willingness to take risk but have other obligations that prevent you from adopting such a strategy. Simply put, risk tolerances vary widely. There's also a psychological risk when it comes to investing: Some people literally can't sleep at night knowing their money is in danger of losing value. Stock market risk most famously comes in the form of volatility, or the tendency for investment values to fluctuate in either direction (at least in the short term). While it's somewhat in vogue to ignore the importance of being able to sleep at night, you'd be smart to exercise caution before you take on more risk than you can personally bear.

Your investment time horizon

With regard to time horizon, you should only be investing money in the stock market that you won't need for at leastÂ three years -- some people even advocate five years as a minimum time frame. Regardless, if you're planning on using the money in six months for a down payment on a home or a large college tuition bill, you shouldn't be investing it in the stock market. One of the keys to determining your time horizon for various buckets of money is to create an asset allocation as part of a complete financial plan. You might start with an emergency fund -- money meant to cover short-term expenses in the event of job loss or other emergencies. From there, you can build a portfolio of stocks, bonds, and other investments that reflects your ability to take risk over specific periods of time. Money in a child's education fund meant for use in several decades can be earmarked as a long-term account whereas money meant for a home renovation next year will require short-term management. In brief: A long time horizon -- say, of at least five years -- is a sign you're ready for a stock market investment.

What if the market is at an all-time high?

Bears beware: The fact remains that over long periods of time, the stock market has rarely lost money. If you had invested money at all of the previous all-time highs -- despite the crazy volatility often found in between -- you'd have come out ahead. You may have even come out very far ahead depending on the specific time period during which you began. Investing now has a few important advantages. First, the sooner you invest, the sooner you'll be eligible to collect dividends, for example, and accumulate more shares. This is the very essence of compounding. Through compounding asset values, you'll be shocked at how fast your money can grow. Next, investing now will start your holding period for preferential long-term capital gains tax treatment. Long-term capital gains rates reward investors who have held stocks and bonds for over a year. Over time, you want as much of your income as possible taxed at as low a rate as possible -- the sooner you start investing, the sooner this will happen.

Invest, but have a strategy in place

The stock market -- without question -- can make you a very wealthy individual if you stick to the basics. Invest early and often, sell only when necessary, and focus on the long term. But before you do, make sure to take a thorough look at your entire financial picture and be entirely honest with yourself about your appetite for risk as well as your relevant investment time horizon. If everything checks out, proceed confidently and invest now.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should you really be investing in the stock market right now? appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Wondering where you should invest $1,000 right now?

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* Returns as of 20 Feb 2026

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Sam Swenson, CFA, CPA has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.