Key Takeaways<\/p>\n
In a recent survey of over 1,000 investors, about 86% of high-risk retirees failed to meet a basic asset diversification benchmark<\/a>. As retirement nears, many investors shift their focus to minimizing risk<\/a>, often by pulling away from stocks in favor of safer assets like bonds and cash. However, a new study reveals that this strategy may leave retirees dangerously exposed to a different kind of risk: not having enough long-term growth. According to research from Jackson National Life Insurance Co., a staggering 86% of high-risk retirees fail the crucial test of proper diversification.\n<\/p>\n As experts caution, this type of overreliance on bonds and cash<\/a> can undermine long-term retirement security, making it essential for retirees to strike a balance by including growth assets like stocks in their portfolios.\n<\/p>\n What the Diversification Test Reveals <\/p>\n The Jackson study assessed investors\u2019 exposure to market risks based on five key financial benchmarks<\/a>: spending, saving, cash allocation, stock-bond split, and asset diversification. Those who met fewer than two benchmarks were categorized as high-index, or the most vulnerable to market risk.\n<\/p>\n How Many Investors Are High-Risk?<\/p>\n According to the study, which surveyed over 1,000 investors, 22% were classified as high-risk, compared to 57% classified as medium-risk, and 21% as low-risk.<\/p>\n To test diversification, the study examined whether investors held assets in at least four of five categories: stocks, bond funds, cash, bonds, and other investments, and 86% of high-risk investors failed to meet this basic benchmark.\n<\/p>\n Instead, many have allocated far too much of their portfolio to cash or bonds, leaving them vulnerable to inflation<\/a> and outliving their savings<\/a>. The study found that 49% of these retirees hold nearly half their assets in cash, well above the recommended 20% of assets.\n<\/p>\n Why Retirees Struggle With Proper Diversification <\/p>\n Experts warn that retirees who seek safety in bonds and cash may be overlooking the larger risks: inflation and the possibility of outliving their assets. \u201cMost retirees think they\u2019re avoiding risk by piling into bonds and cash,\u201d says Ryan Graves<\/a>, founder of Bemiston Asset Management. However, as inflation eats away at the value of cash and bonds, \u201cexcessive cash and bonds won\u2019t save you\u2014it guarantees you\u2019ll fall behind.\u201d\n<\/p>\n In fact, Graves says the most common mistake he sees is equating safety with cash<\/a>. Meanwhile, other investors similarly seeking safety may overconcentrate in dividend stocks and bonds, becoming too focused on current income instead of growth, he adds.\n<\/p>\n Malissa Marshall<\/a>, founder of Soaring Wealth, observes another issue in her clients\u2019 portfolios: Many accumulate a \u201chodgepodge\u201d of investments over time without understanding the importance of diversification. \u201cThey\u2019ve accumulated target-date funds and individual stock picks, duplicating holdings inadvertently,\u201d she says.\n<\/p>\n When retirees become overexposed to one asset class, Marshall likes to point to the Callan Periodic Table as evidence that past performance doesn\u2019t guarantee future success. For example, cash was among the worst-performing asset classes in 2016 and 2017, only to top investment returns in 2018, according to Callan.\n<\/p>\n Another issue is that retirees often over-rely on the S&P 500, thinking it offers complete diversification. But Beau Kemp<\/a>, an advisor at SwitchPoint Financial Planning, warns that the S&P 500 is \u201cheavily tilted toward large U.S. companies,\u201d which can underperform in certain markets. During the 2000s, for example, small caps and emerging markets outperformed while large caps struggled, Kemp notes. \u201cWe don\u2019t have to look far back to see how painful it can be when U.S. large caps underperform for an extended period,\u201d he says.\n<\/p>\n How Financial Experts Recommend Fixing the Problem <\/p>\n Financial advisors emphasize the importance of a balanced approach<\/a>. Rather than simply relying on cash and bonds or leaning in too heavily on stocks, experts recommend diversifying across different asset classes. Experts often recommend having three years of retirement expenses in low-volatility assets like money markets, short-term bonds, or individual bonds, Kemp notes, but he suggests pushing closer to five years or more if you can.\n<\/p>\n Kemp also stresses the importance of being diversified within your stock portfolio\u2014not just U.S. large caps, but also small caps and midcaps, developed international markets, and emerging markets. \u201cThis type of diversification helps manage sequence of returns risk in retirement because it ensures that some parts of the portfolio are working when others aren\u2019t,\u201d he says.\n<\/p>\n Moreover, dynamic strategies are key to managing market risk. \u201cYou need dynamic withdrawal strategies\u2014flexibility to spend less in down years and more in strong markets,\u201d says Graves, adding that being dynamic also means adjusting your investments<\/a> when the numbers don\u2019t add up. For example, in early 2021, 10-year Treasury bonds were paying less than inflation, meaning investors who stuck with a fixed mix of bonds risked guaranteed losses\u2014when shifting more into stocks might have made more sense.\n<\/p>\n The Bottom Line <\/p>\n For many retirees, the temptation to play it safe can actually be a risky move. In fact, retirees who focus too heavily on cash or bonds may unintentionally expose themselves to greater long-term risks\u2014and according to Jackson research, many high-risk investors fall right into this trap.\n<\/p>\n
\nFinancial experts caution against overly relying on cash and bonds to avoid market risk and instead recommend balancing cash, bonds, stocks<\/a>, and other investments for long-term growth.
\nDynamic withdrawal strategies and adjusting asset allocation are key to managing market risk in retirement.<\/p>\n