I’m retiring in 2 years, but my investments are suffering. What to do?

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Q. I plan to retire in two years. My portfolio is 50/50 bonds and stocks. With the bond losses I’m afraid I’m falling too far behind. Should I put more in stocks?
— Investor

A. There’s never a bad time to review the asset allocation of your portfolio.

It has been a difficult year for traditional stock and bond portfolios.

Many issues have affected both stocks and bonds negatively, including macroeconomic factors such as higher inflation and interest rates, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

“Broadly speaking in terms of stocks, higher inflation tends to be a headwind to corporate profit margins, and higher interest rates tend to have the effect of lowering the value of the future cash flows companies are expected to produce when discounting those cash flows back to today at the higher interest rates,” he said. “Bonds tend to have an inverse relationship to interest rates, in that when interest rates move up, the price of bonds move down — a bond issued at a lower interest rate prior to a move up in yields, isn’t worth as much as new bonds issued at the higher interest rates.”

While the macroeconomic backdrop has been a challenging one and remains uncertain, the question as to how much may be appropriate for you to have in stocks and bonds, and what is appropriate for your overall asset allocation, is best answered in the context of an overall financial plan with a focus on long-term cash flow planning, he said.

Your overall asset allocation should ideally be constructed with a long-term view in mind, and contemplate your overall goals, objectives and financial situation, Pawlik said.

“A broader financial plan that takes into account variables such as your current and projected income, your overall investable assets, and your anticipated expenses in retirement, can serve as a roadmap and a powerful frame of reference for making decisions like how much to have in stocks versus bonds, as well as help to build context around the potential impacts of those decisions,” he said.

He said the financial plan can also help to determine what level of return you may need to generate on your assets, alongside your other income sources, in order to meet your needs in retirement and keep pace with inflation over the long-term.

“An asset allocation that is designed to achieve that targeted average annual rate of return over the long-term, while aiming to minimize the risk involved with doing so, can then be constructed with your overall financial situation in mind,” he said. “The plan can also help to build context around the associated risk involved with investing for a certain level of return over the long-term, and the potential impacts on your portfolio during volatile periods in the market.”

It is also important to focus on building a well-diversified portfolio that includes allocations to several different asset classes, including both foreign and domestic stock and bond investments, investments in companies of different sizes, as well as alternative investments, he said.

“Broader financial planning and the strategy for the management of your investment portfolio, should be revisited on an on-going basis as part of a dynamic process that continues to contemplate your overall circumstances, as well as any significant changes in your life and/or your overall goals,” he said.

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This story was originally published on Nov. 22, 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.