By Elizabeth O'Brien
Aug. 9, 2023
Despite this week’s dip, investors are riding high on the stock market’s 2023 gains, with pros revising their forecasts upward and individual investors feeling bullish. It’s a smart time for retirees to consider rebalancing, experts say.
It’s a good practice for all investors to periodically check that their portfolio mix remains in line with their target allocations. But it’s arguably more important for retirees, who have a smaller margin of error than those with a long horizon to ride out the market’s ups and downs.
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The S&P 500 is up about 17% for the year. In late July, Citigroup raised its year-end forecast for the index by 15% on what analysts said was a higher probability that the Federal Reserve will achieve the hoped-for “soft landing”—that is, taming inflation without tipping the economy into a recession. Meanwhile, nearly half of everyday investors expect stock prices will rise over the next six months, according to the most recent AAII Investor Sentiment Survey.
Retirees who started the year with a portfolio of 60% U.S. stock and 40% U.S. bonds would now have about 63.6% stock and 36.4% bonds, says Katie Nixon, chief investment officer, wealth management, at Northern Trust. U.S. equities look pricey, trading at 20 times forward earnings. Taxable bonds, on the other hand, are up around 1% for the year.
Taking some profits on your stock and beefing up your bonds will help you buy low and sell high, the holy grail of investing. What’s more, adding to your bond allocation will help you take advantage of today’s plump yields in safe assets. The 2-year Treasury note, for example, yields about 4.7% right now.
Christine Benz, director of personal finance and retirement planning for Morningstar, recommends that retirees create a personal “investment policy statement” to guide them. In addition to a target asset allocation—say 60/40 stock and bonds—the statement should also include rebalancing thresholds. For example, you could decide that you will rebalance only when your current allocation veers more than 5 percentage points from your target in either direction.
Yet rather than checking your portfolio after every market move, Benz generally advocates that retirees conduct an annual portfolio review at the same time each year (it doesn’t matter when). That will allow you to evaluate your asset allocation relative to your targets on a regular cadence, and make changes if necessary.
“Doing a portfolio review at the same time each year saves you from having to check your portfolio’s allocations too frequently, and imposes a nice sense of discipline on the process,” Benz says.
Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com
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