Retirement - Your Second First Job (2)

The old rule of thumb regarding asset allocation calls for a portfolio to consist of a percentage of debt securities equal to your age and the balance invested in equities.  At the age of 65, you would have 35% of your retirement funds in equities under the rule.  As with all rules of thumb, they should not be followed blindly.  Setting your allocation percentages is not a "one and done" decision.  You should expect to change your allocation over time as circumstances dictate.There are a couple of other factors to keep in mind.  

A retiree must take the present state of the market into account in establishing his or her allocation between debt and equity securities.  Is the Market rising, declining or moving sideways?  Some consideration of the market is necessary when deciding how to allocate your portfolio.  As the Market changes, it is possible that your asset allocation must follow in some fashion.  How that occurs must be based in part on your investment mentality.

More important than the state of the market is your mental state.  You must honestly determine your risk tolerance.  Warren Buffett said that if you could not tolerate a decline of 50% in your portfolio's value without selling out your position, you should probably not invest in individual stocks.  Over your remaining years, the Market will rise and fall several times, carrying a portfolio of common stocks with it.  If a drop of 50% in value will likely lead you to panic selling, your equity allocation should be smaller than that of an investor who is psychologically able to ride out the decline.  It is said that someone once told J.P. Morgan that frequent changes in the value of the individual's  portfolio were causing him to lose sleep and asked what he should do about it.  Morgan's famous reply was "sell down until you can sleep."  Although anecdotal, the advice may be a good way to decide how much you keep in equities.  Retirement is supposed to be relaxing, not nerve wracking.

The most frequent question asked by the soon to be retired individual focuses on how large a portfolio he or she needs.  Remember the TV ads with the tag line, "What's your number?"  Fred Schwed, in his book Where Are the Customers' Yachts? or A Good Hard Look At Wall Street pointed out an interesting difference between American and British investors as follows:

The British, as a race, have been engaged with the problems of capital investment for a longer period than we have, and accordingly have reached a greater maturity regarding it.  Have you noticed that when you ask a Britisher about a man's wealth you get an answer quite different from that an American gives you?  The American says, "I wouldn't be surprised if he's worth close to a million dollars."  The Englishman says, "I fancy he has five thousand pounds a year."  The Englishman's habitual way of speaking and thinking about wealth is of course much closer to the nub of the matter.  A man's true wealth is his income, not his bank balance.

The retiree's goal is to manage his or her portfolio in such a fashion that there is enough income to sustain a desired life style.  It is up to the individual to do this; the Second First Job.  We will continue to look at this issue in the next post.

Excerpt from Where Are the Customer's Yachts? or A Good Hard Look At Wall Street, Fred Schwed, Jr., copyright 1940, republished by John Wiley & Sons, Inc, page 190.

Comments are always welcome.