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Money Magazine Ask the Mole

Gambling with your retirement stash

It's tempting to change your asset allocation in tough times like these. Don't give in - stick to your original plan.

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By the Mole, Money Magazine's undercover financial planner

Thinking about rebalancing your portfolio to take advantage of current stock prices? Resist the urge.
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NEW YORK (Money) -- Question: I'm 57 and planning to retire at 66. Before this year's stock market turmoil my 401(k) was balanced at 70% stock mutual funds and 30% bond funds. Now it's 59% stock and 41% bonds. To take advantage of very low stock prices I was thinking about re-balancing to 75% stocks and 25% bonds. Does this sound like a good plan or should I just re-balance to 70% and 30%?

The Mole's Answer: Well, you're doing two things right already:

  • You are not in a panic mode, as many are, and haven't sold your remaining stock.
  • You are going against the herd and considering buying when others are selling.

There is still the current problem to deal with, however: As the value of your stocks dropped and your bonds increased, your portfolio became more heavily weighted in bonds. Now you are wondering if you should go back to your original allocation target or even go beyond that target and increase your stocks from the original 70% target to 75%.

My advice is to stick with your target and I'll tell you why.

First of all, I think it's critical to develop an asset allocation target. The portion of your portfolio that should be in equities depends on two things - your willingness to take risk and your need to take risk.

You clearly have a willingness to take risk, as demonstrated by your interest in buying more stocks after this rather dismal bear market. I happen to think that this is a good thing. But I don't know your need to take risk.

One's need to take risk is driven by how close you are to achieving your goals. If retirement is your goal and you have a lot saved up with low living expenses, you probably want a very conservative portfolio of, say, 30% in stocks. But if you are far from this goal, then you will need to take more risk and may need 70% of your portfolio in stocks.

I'm not a believer that you can set your allocation based on taking a risk profile survey since research shows how we feel about risk is very unstable over time. I am a believer, however, that once an allocation is set, we need to leave it alone. That is to say, the more we change our allocation targets, the lower our returns tend to be.

So I'm all for rebalancing your portfolio back to 70% stocks, though I would caution against going up to 75% because you feel stocks are now cheap. We don't know that for sure. U.S. stocks declined 37% last year, but this was by no means a record.

You may be feeling what I'm feeling right now. The pain of watching our portfolios decline may be driving us to take more risk to try to get back our losses as quickly as possible. Research indicates that people are generally risk averse, then do a 180 and become risk takers when faced with painful losses.

Increasing our stock portfolios after this loss may be the Las Vegas equivalent of doubling our bets at the blackjack table to try to get back some hefty losses. We don't want to become the guy who loses most of his fortune and promises to stop as soon as he gets it back.

So I'd recommend you stick with rebalancing back to your target rather than increasing that target. Then gradually get less aggressive as you get closer to reaching your goals.

You are doing what Warren Buffett once said: "Be fearful when others are greedy and greedy when others are fearful." This is a really good thing, but let's not go overboard on the greed.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail themole@moneymail.com. To top of page

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