At some point, you may need to cash in your parts of your portfolio to convert it to a less volatile vehicle such as bonds or cash instruments.
You are vulnerable to a major correction that may hit your individual stocks harder than the broader markets. Not all individual stocks are hit as hard as indexes during a correction.
Recovering Stocks
Although market indexes may recover quicker, individual stocks may or may not. Some never recover.This raises an important issue for stock investors: timing.
As you approach the time you will need to convert stock assets into something more stable, when to sell and how do you decide what to do if a correction in the market happens just before you need to covert?
A good way to visualize the transition is what you do when you exit the interstate and enter city streets.
If you do it safely and sanely, you ease up on the gas and reduce your speed (growth stocks and risk), but you maintain some speed (no traffic jams, you hope).
Holding Stocks
Most retirement specialists recommend you keep a certain percentage of your portfolio in stocks even after you retire as a hedge against inflation and to provide the opportunity for continued growth.The general rule is your age subtracted from 100. The remainder is the percentage of assets in stocks, however you will need to determine what’s appropriate for you individual situation and risk profile.
The balance should be in bonds or cash as a basic configuration.
Don’t wait until age 65 to make the adjustment. Stocks have a five-year window of vulnerability.
Short-Term Stocks
This means you shouldn’t hold stocks for any need that is fewer than five years in the future.As you approach retirement you should examine your portfolio and decide which stocks are too volatile (for your retirement risk profile).
These can be sold and the proceeds used to buy either bonds, cash instruments or more stable, dividend-paying stocks.
With people living longer, their money must work harder and longer than in the past.
Stocks are still the best long-term solution to financial security, however don’t expect them to be risk-free, especially in the short term.
