By Steve Garmhausen
June 28, 2023
A recent article in The Wall Street Journal describes how many baby boomers remain attached to stocks, even in retirement. Adults age 65 and up are the only group of Americans to see stock ownership rates rise since before the 2008 financial crisis, according to the article. Whether because of sentimental attachment, fear of missing out, or tax aversion, older Americans often overweight their portfolios to stocks, which could put their retirement goals in jeopardy. So for this week’s Barron’s Advisor Big Q column, we asked financial advisors: “How do you persuade baby boomer clients who own too much stock to reallocate?”
Dreamstime
Eric Sweeney, wealth manager, Steward Partners: I think the biggest thing is explaining, “OK, this is your income stream; it’s what you need to live off.” One thing I do is to say, “Your financial plan says you need $25,000 every single month to live off. Well, now that you’re in retirement, what if that gets cut in half because your portfolio falls and we need to take out principal?” As opposed to, you know, guaranteeing you the money in a CD or building out a CD ladder that’s going to get you 5% or potentially more.
I also use different analogies depending on who I’m talking to. “Would you rather just have a rifle to go shoot a bird—and if you miss, you’re not eating—or would you like a shotgun?” Or, “Would you rather plant one tree and hope it produces a ton of fruit, or are we going to plant a row of trees?”
This is the perfect time to have these conversations. Baby boomers have seen such low returns on bonds over the past handful of years that they’re kind of spooked going from stocks to bonds. So now when I break down what the returns are now on bond portfolios, they’re typically like, “Wow, we didn’t realize that things had gone up.”
Ed Cofrancesco, president, International Assets Advisory: I use math, I use illustrations; sometimes it’s a PowerPoint, sometimes it’s the back of a napkin. We talk about simple math. We’ve had real-life examples of the risks, like the tech-bubble burst and the market crash of ’07 to ’09, where if you lose 50%, you needed a 100% gain to get back to square one. And how realistic is that in a short period?
I can be sarcastic quite often. I remember years ago writing in a newsletter for clients that if you’re not going to listen to our (diversification) advice, then our other advice is to eat in excess, drink heavy doses of alcohol, and smoke nonfiltered cigarettes to shorten your life span. This is tongue-in-cheek, but tell people they need to die younger and you’ll get their attention.
Andy Watts, vice president of planning and growth solutions, Avantax: It depends on your client’s rationale for why they’re holding on to the stock. In my experience, there are three primary reasons. One of the more common ones is emotion or sentiment. That conversation looks very different than the next reason, which is performance. And that’s very different from the third one, which is taxes. I’ve certainly run into situations where each one of those, or maybe all of them, are playing a role. You have to uncover what is behind it so that you then address it. There has to be this kind of opening salvo to leads the conversation back into a place of reason. What is the story behind the stock?
Oftentimes when it’s a concentrated stock position, it’s “my grandfather bequeathed me this stock.” And it’s a stock they have held on to for 40 years. In cases like that, the adage applies: “They don’t care how much you know until they know how much you care.” Once they know, then we can ultimately get to the facts about risk.
When performance is the reason for holding on to the stock, either historical or future performance, they might have seen the stock double and think it will double again. Or they have got a buddy who told them they should buy the stock. Often what we see is that they don’t quite understand the risk that they’re taking in doing so. From there it’s, “Help me understand the back story of how you’ve landed this particular stock or set of stocks, and let’s talk through what you’re ultimately looking to accomplish.” When taxes are the issue, we typically have a very real conversation about the fact that taxes aren’t evil but are a means of helping us get to a better solution for your needs. We will stress that we can unwind the taxable situation over time, we don’t have to sell everything today.
Jason Blackwell, chief investment strategist, The Colony Group: The argument’s a little easier to make today than it was even three years ago. One thing that’s different now is that the cost of diversification has come down considerably. I’m making a lot more on my fixed-income portfolio than I was three or four years ago. It was a big hit to go to zero on my fixed income or my cash, but it’s much less of a hit when I’m looking at earning 4% or 5% or 6% on a bond portfolio. So some of that is just showing clients the math and how the cost of diversification has come down. The Fed won’t keep rates where they are forever. But our view is we won’t come back to zero absent a major market event that requires it. We do expect to continue to make money on the fixed-income side of the portfolio for some time.
The other part, and this hasn’t changed, is walking them through the sequencing of returns. When you’re in the accumulation phase, it’s actually fine when the market goes down big, because you’re adding money to the portfolio every year. It becomes much more problematic when you’re withdrawing in down years. So as clients are nearing retirement age, we start to show them what sequencing risk looks like. We don’t want their retirement age to be dependent on whether it’s starting out when the equity markets are high or low. We’ve found those two arguments to be pretty compelling.
Write to advisor.editors@barrons.com
This Barron's article was legally licensed by AdvisorStream.
Dow Jones & Company, Inc.
