20 Jul Should I sell half my portfolio and put it in cash?

Q. I am 85 and my wife is 76. We live comfortably on Social Security and two rather meager pensions. Our very conservative investment portfolio is down almost 15 percent in recent months. I was in favor of turning at least half of it into cash so as to not take on additional losses at least in part of the portfolio. I would get back onto the market when things turn around. Our financial advisor says to hold our positions because you don’t want to sell at the bottom of the market and make our losses permanent. Our asset allocation is approximately 50/50 in very conservative stock and bond funds and nothing is in cash. I usually save my retirement distributions and we generally do not depend on the portfolio for income. If I was younger I might think differently.
— Concerned

A. We’re glad to hear that your income from Social Security and pensions allows you to live comfortably.

Knowing that should make it easier to cope with a sustained market downturn like the one we’ve experienced this year, which is unsettling at best.

Here’s what you should consider before making any drastic moves with your portfolio.

Let’s start with age.

When structuring an investment portfolio, an investor’s age is certainly important, but we also need to consider the whole financial picture, Gene McGovern, a certified financial planner with McGovern Financial Advisors in Westfield.

That includes items such as the person’s goals, needs, income, expenses, debts and their tolerance for investment risk, he said, noting that people vary in their willingness to assume investment risk, regardless of their age.

“Some of us like to bet on individual stocks, which can be risky, while others prefer to keep their money under the proverbial mattress, or at least in FDIC-insured bank accounts,” McGovern said. “Most of us fall somewhere in between.”

In addition to risk tolerance, we also need to think about risk capacity. Can you continue to meet your financial needs and goals in the face of a market downturn? Here’s where age often becomes most important.

If you’re young and have a long career ahead of you, your risk capacity is usually high because you have many years to generate income, save, and invest, McGovern said. You have a long time for your money to grow and compound.

If you’re older or retired and depend on your investments for income, you may have less risk capacity, even if your tolerance for risk is high, he said. You have less time for your money to rebound from a market downturn, and less room for error.

In any event, while the appropriate investment advice may differ with age, the principles underlying that advice remain the same, McGovern said.

“To begin with, investors of any age should establish an appropriate strategic asset allocation that supports their short-term and long-term goals and is consistent with their individual risk tolerance and capacity,” he said. “That means deciding how much of your total portfolio should be allocated to stocks, bonds, cash or other asset classes, and then periodically rebalancing to maintain that asset allocation.”

Your portfolio should let you sleep at night, regardless of what’s happening day to day in the market, McGovern said.

Next, make sure to diversify your investments within those asset classes. As the old saying goes: Diversification is the only free lunch when it comes to investing.

He said with stocks, for example, you may want to invest in domestic and foreign stocks, large-cap and small-cap stocks, value or growth stocks. With bonds, you might consider U.S. corporate bonds, Treasury bonds, municipal bonds or foreign bonds. You can choose among short-, intermediate- and long-term bonds.

The goal is a well-balanced, diversified portfolio that’s appropriate for you, he said.

Your question of whether you should sell some of your portfolio now and move it into cash suggests that you may not be comfortable with your current asset allocation and may want to establish a new one, he said. That’s a conversation to have with your investment advisor.

More broadly, however, trying to time the market is difficult if not impossible, McGovern said. Selling investments after they’ve fallen in value does lock in losses. Nor is there any guarantee that the market will go up instead of down at the point you eventually decide to get back in, he said.

Meanwhile, holding cash can stave off further market losses, but it subjects you to inflation risk, he said.

“For example, investing cash at 1% when inflation is running at 9%, as it is now, means that your money is losing nearly 8%t of its value every year,” he said. “After just five years, $1,000 held in cash would be worth only $672, losing a third of its value.”

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This story was originally published on July 20, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.