20 Oct All stocks and near retirement? Bad idea

Q. My stock broker has always made investment recommendations and I’ve done okay. The investments are all stocks and no mutual funds. I’m retiring soon and I’m not sure if all stocks is the way to go. What should I think about?
— Retiring soon

A. If you’re retiring soon, you have a problem.

It sounds like you’ve got the portfolio of a much younger investor.

There’s nothing wrong with working with a stock broker, but the decisions you make with your money today will impact your financial life for the rest of your days. You may want to consider working with a financial advisor who does more than investment selection, but someone who can advise you on estate planning, insurance and more.

Now, your portfolio. An all-stock portfolio is usually a super risky and aggressive one.

There are several factors to consider, especially if you’re hoping to change this from an “accumulation” type of portfolio to a “distribution” type portfolio, which you may need in retirement, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

“Depending upon how many stocks you are invested in, you may not have enough diversification,” she said. “It’s suggested to get a less risky asset allocation, as this determines the overall rate of return of your portfolio.”

She said you don’t want all your eggs in one basket. With your current portfolio, if the market goes up, you’ll do well, but when the market corrects, you will feel the pain that much more.

D’Agostini recommends you start with a risk tolerance questionnaire, and then assess how much risk you’re willing to take to achieve your goals.

“If you have held these stocks for a long time, you may have significant gains, which need some attention as you attempt to restructure your asset allocation since there may be significant tax ramifications,” D’Agostini said. “A 60/40 (stocks to bonds) or 50/50 portfolio has a higher success rate in retirement, which is defined as providing a 4 percent annual distribution from the account.”

Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, says if your portfolio is 100 percent in stocks and you’re retiring, you need a new advisor.

“You have the ability to lose around 40-plus percent of your money, which makes for a bad retirement,” Lynch said.

Lynch recommends you invest no more than 60 percent in stocks, and maybe less depending on the specifics of your situation.

To your stocks versus mutual funds question, Lynch said it really depends on the size of your portfolio.

“If you have a lot of money, individual stocks are more tax efficient and you can control the portfolio more,” Lynch said. “Mutual funds generally will be more diversified then an individual stock portfolio, but more expensive.”

In his 28 years of financial planning, Lynch said, he’s hasn’t recommended individual stocks for several reasons.

First, he said, most advisors do not have the capacity to do the research to pick the stock.

“Most stock pickers are `certified financial analysts’ that have an intense training program and three years’ worth of really difficult exams,” he said.

Next, he said most advisors he’s heard giving individual stock recommendations aren’t giving their own recommendations, but offering picks from the firm’s analyst, with no guarantee the advisor understands why the stock was picked, and for how long it’s expected to be a winner.

“After a while, it gets very difficult to manage, Lynch said. “For example, you can own 500 individual stocks or the S&P 500. The S&P is much easier to manage.”

If you’d like someone to take a closer look at your portfolio — for free — consider applying to NJMoneyHelp.com’s money makeover program.

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This story was first posted in October 2015.