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5 Shrewd Ways to Adjust Your Portfolio As You Near Retirement

Author: Linda Vergon / Source: fivecentnickel.com

Life was good at the end of 2007 for Bill and Mary.

Bill, at age 60, had enjoyed a successful career with Walgreen’s, one of the largest retail companies in America. His career, begun 28 years previously, enabled Mary to be a stay-at-home mom and paid for their two kids’ college education. It also enabled the couple to build a $1 million position in a Fidelity New Millenium Fund through consistent investments over the years.

During the previous decade, Bill had been the beneficiary of annual stock options, which he faithfully exercised, maintaining the common stock with the faith that the company would continue to grow in value. By 2007, the stock was worth more than $300,000. The couple was looking forward to Bill’s early retirement in 2010. They hoped to travel to make up for all the trips they’d foregone during the early years of saving for retirement and college.

Then disaster struck.

With the Great Recession, the S&P 500 fell more than 800 points, a 55% decrease. While the New Millennium Fund did better than the general market average — losing only 48% of its value — the value of Bill and Mary’s portfolio dropped to slightly more than $150,000. The Walgreen’s stock also suffered, falling from $48 per share in September to $23 in 2009.

The options Bill had yet to exercise were underwater. Their plans for an early retirement were no longer possible.

What Could They Have Done?

Yes, it would have been difficult to avoid the economic tsunami that hit the world in those waning years of the last decade. However, Bill and Mary could have taken steps to reduce their vulnerability and limit the damage to their retirement portfolios.

Keep yourself out of Bill and Mary’s position. If you anticipate retiring within the next five years, it is time to work with your financial advisor and accountant. Your priority? To adjust your portfolio to avoid a similar circumstance.

Portfolio Adjustments

When you are nearing retirement, you are nearing the finish line of the investment portion of your life.

At retirement, you’re more likely to liquidate (rather than make) investments, reducing risk and shifting into investments that generate income. The pace of your transition depends upon your individual risk tolerance, the time remaining until retirement, and the existing capacity of your investments to provide the income desired when you are no longer working.

By using the following strategies, you can reduce your vulnerability to economic downturns and bear market calamities:

1. Reduce Individual Stock Positions

If you’ve purchased individual market securities, received your company’s stock through a stock purchase plan, or exercised company stock options, consider replacing your individual stocks with a portfolio of investments. This will help to reduce your investment risk.

Betting your future on the performance of a single company is akin to going all-in on a flush in a high-stakes poker game. Five cards in a single suit is a good hand; the odds say you will win 83% of the time. But your opponent could still have a full house, four-of-a-kind, straight flush, or royal flush. Similarly, a business downturn, the entry of a new competitor, or a technological break-through can turn the fortunes of a single business upside-down.

Reduce your risk by selling all or a majority of your single company stock. Then, invest the proceeds into a pool of securities, whether managed as in a mutual fund or unmanaged as an ETF. This strategy can help make you less vulnerable to market downturns.

2. Reduce Equity Risk Exposure Generally

According to a report by Towers Watson, defined-benefit pension plans have consistently out-performed 401k plans. Experts claim the reason is that pension plans are more heavily diversified. They tend to have investments in fixed income, real estate, and emerging markets equity and debt.

Of course, pensions are hard to come by these days, and younger…

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