Should portfolios change for retirement?

Should portfolios get more conservative leading up to retirement?

You may want to reduce financial risk as your human capital decreases, but (empirically) people get less risk averse as they get wealthier.

Together, these can lead to a flat optimal asset allocation over time.
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[patienceisalpha]

It's all relative but makes sense. A big drawdown on an account providing an OK lifestyle is not felt the same as a big drawdown on a really large account. If I lose half of my 10M portfolio I can probably weather the storm while my new 5M portfolio climbs up. If I lose half of a 2M portfolio my lifestyle now sucks hard.

[ariefraiser]

I'm 100% stocks and plan to be 75% stocks in retirement. Still fairly aggressive but I wouldn't want to be 100% stocks in retirement if I'm relying on my portfolio to fund my life. It's easy being bullish on an all stock portfolio when you're not relying on it but ince you start relying on it it's a whole different ball game.

[chronographer]

What people are comfortable with and what is optimal are different things.

[kantace]

In a sense, this is a decrease in loss aversion due to the decreasing utility value of money.

Although People risk more money in absolute terms, the risk relatively little for their overall QoL.

[coffeeandlifting]

I've thought about this a lot, and I think an aggressive allocation in retirement would be ideal while paired with a flexible withdrawal system. You would get the increased average returns of the stocks over time while minimizing the damage of excess withdrawal during down years.

[pabloaguilar]

This is so true in practice, after working in a family office for UHNW, they do diversify in general but allocate more and more to private investments higher risk profiles seeking higher returns

[SoftwareEngineerDoes]

Volatility is risky when you have to withdraw money. Above some threshold, you don't need to withdraw it.

[ironcito]

So there's evidence that investors don't get more conservative as they age and become wealthier, but how does that mean that they _shouldn't_ become more conservative?

[mikegb]

Of course, the more wealth you have, the greater your resilience to volatility. Imagine a crash where the stock market goes down 50%. Who would you rather be: 1) a young person with $200k or an older person with $2M?

[oldgreg]

This has basically been my plan since my teens...maintain a high thrust-setting for long enough and you can potentially outrun the need to fret volatility.

[jmc]

Makes sense. One key factor is prob unprecedented access to good investment/financial info. Too much? Understanding can incr confidence but info overload can incr confusion. If willing/able to DYOR and think critically it’s a positive.

[mrslcom]

Place any money you will need in the next 3-4 years in risk-free investments. The rest can stay in stocks and equities.

[NATOnova]

would love a full video on this. a glide path strategy, reallocating portfolio to more conservative as you age, from what I've observed is basically taken as gospel. would love to hear a breakdown looking into the arguments against it

[curtis]

If your life time liabilities are covered, you've essentially crossed a different threshold in terms of your risk & loss aversion. You become a surplus investor and your view on the life cycle of your money changes. Imagine how long your wealth can out live you in this context, and then tell me you don't become more and more concerned about stewardship and the preservation of your purchase power. It's like an endowment mindset, and it's pretty cool to think about.

[ahadmrauf]

Isn't that the whole point of the recommendations to go more conservative near retirement? People tend to me more risky once they become their wealthiest near retirement, opening potential for them to lose money that would have helped them during retirement. I always saw it as life advice, not a natural tendency, personally.

[chesterchambers]

Prof. William F Sharpe stated on several occasions that he became less risk averse as he became more wealthy. This does have to be balanced against increased risk aversion based on age.

[georgemanka]

As we live longer, we will still need some growth in our portfolios to overcome longevity risk.

[mere_cat]

Makes sense and I’ve seen it in my own portfolio.

[fahmikhairulazmi]

Makes perfect sense. If you hold 60/40 portfolio, there's really no point of reducing stocks because 40% bond have already cushion the downside risk of stocks.

[franklintyler]

Wouldn’t that change what the individuals safe withdrawal rate would be substantially?