Investing solely based on one’s proximity to retirement and not the broad economic environment is a mistake, writes Landon Whaley.
Last Saturday, I was enjoying my Saturday morning routine of firing up my brain cells with an espresso, while checking out Herbstreit and the boys on College Game Day when my best friend sent me an article entitled “Baby boomers are gambling their retirements with risky 401(k)s.” Now, I generally shut off my global macro brain on the weekend to recharge and come back strong on Monday, but I decided to give the article a once over. What began as a simple perusing quickly awoke the anti-Old Institution rage rhino inside of me, and I knew then and there that I had my next article.
Based on the latest quarterly study of retirement accounts in their custody, Fidelity shared some statistics that left me frustrated.
First, Fidelity found that out of 30 million retirement accounts, 53% of people contributing to 401(k)s and 66% of folks plowing money into a 403(b), have their retirement assets 100% invested in a target-date fund. For the uninitiated, a target-date fund is a type of mutual fund that rebalances asset class weights over time so that it’s more exposed to stocks when you are young (farther away from retirement) and gradually shifts towards bonds as you get older and closer to your retirement date.
Second, 23% of 401k investors have a higher equity allocation than is recommended for their age, and 7% of people contributing to 401ks have 100% of their retirement savings in equities! These stats get even more gnarly for baby boomers, where 38% have too much equity exposure, and 8% are 100% invested in stocks! Holy shmoly!
I’ve been in this game for nearly 20 years, and over that time I’ve seen a ton of outdated and dogmatic beliefs about the way markets work and the right way to invest.
You know the beliefs I’m talking about here. Notions like “diversification is good, concentration is bad,” “the stock markets always come back,” “old people should buy bonds, and young people should own stocks,” to name a few.
While I could teach an entire college course debunking popular market beliefs perpetuated by the Old Institution, the Fidelity data is screaming for us to have a conversation about the pervasive idea that your age should be a deciding factor in how you to allocate your assets.
Folks, I don’t care if your 16, 66, or 106 years old, the number one driver of all your investment decisions should be the prevailing Fundamental Gravity. Likewise, it doesn’t matter whether you are 50 years from retirement, 50 weeks or 50 minutes, you should be allocating your assets based on the prevailing Fundamental Gravity, because the FG drives the risk and return of markets, not your age or your retirement (target) date.
This “age-appropriate” approach to investing is born out of the common misconception that bonds are “safe” while stocks are “risky.” This adage is only accurate when the U.S. economy is experiencing a growth slowing regime, which is only half the time. Just so you don’t think I’m ranting and raving with no data to back me up, let's run through a retirement case study.
Let’s say its June 2016, and you are set to retire in December. First off, congratulations to you, you’ve worked your tail off, and your golden watch is just around the next corner!
Now, if you’re in a target-date fund or allocated based on the commonly held “age appropriateness” belief then you’re heavy on bonds, tilted towards Treasuries, and you’re light on stocks (or out entirely).
Why would you want to risk a drawdown when you’re this close to retirement? You wouldn’t, which is a fundamental flaw in this approach of the Old Institution. We will share more on this on Friday after you had your turkey in part 2.
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