28 Jul Should I pare back stock exposure?

 Q. I’m not all that confident that stocks will keep moving higher in the next few years. Should I pare back my stock exposure? I’m 65 percent in stocks and I’m 42 years old.

A. Ah yes, the crystal ball question.

We don’t have one of those, but we can offer other ways to determine what your exposure should be.

For starters, there is no way to determine with any sort of accuracy whether stocks will or will not continue to move higher in the next few years, said Michael Gibney, a certified financial planner with Highland Financial in Riverdale. So why try to guess?

Gibney said the amount of equity a person has in their portfolio should be driven by one’s “expected return.”

“One’s expected return should be determined by the amount of money they will need to fund their retirement or college funding goal, or to buy a new house,” he said. “Each of these is determined by one’s lifestyle.”

He said if you’re a good saver and you live a modest lifestyle, you may be able to earn a more modest return — meaning one with far less risk. But if you have not been a diligent investor or you’ve have experienced some sort of economic distress such as a job loss or health issues and you have more modest savings, you may need to take additional risk.

All of these questions need to be addressed by creating a financial plan to help you determine your expected return, and then you can make a more informed decision on how much exposure you have in equities, Gibney said. And once this is determined, the exposure should not change drastically unless you have a transition, such as retirement, or your goals change dramatically.

When you consider all this, you need to think about your investment time horizon, said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton.

Your time horizon is how long it will be before you need some or all of the money.

“If you have a long time horizon — let’s say retirement at age 65, which for you would be 23 years — the less of an effect any stock market pullback now will have on your future account,” Hook said.

You also have to consider your risk tolerance, which can be viewed as how much are you willing to see your investments decline before the urge to sell all your investments becomes too strong to ignore.

“Evaluating your risk tolerance can be a tricky thing as well since people tend to overestimate the amount of risk they can stand when markets are good and underestimate returns when markets are bad,” Hook said.

You should also be aware that trying to time the market is very difficult to do. In order to succeed you need to be right two times: once to get out and then to get back in. Not as easy as it sounds, Hook said.

If you need more guidance, consider a sit-down with a certified financial planner who can help you see where you stand on these important issues.

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This story was first posted in July 2015.