Is It Time for a Retirement Portfolio Reset?

What You Need to Know

This year’s bond and stock market losses have left investors with few places to hide, Morningstar’s Christine Benz says.
If and as prices rebound in the new year, retirement-focused investors will have big decisions to make.
Retirement portfolios are different from other portfolios, Benz warns, given the particular danger presented by sequence of returns risk.

From the standpoint of Christine Benz, Morningstar’s director of personal finance, there are still far too many investors approaching retirement with an excess of equities in their portfolio.

This is despite the U.S. and global markets having witnessed one of the most challenging years on record from both a performance and a volume-of-volatility perspective, Benz says in a newly published analysis on Morningstar’s website.

It’s a difficult but urgent issue she urges financial advisors to tackle head-on in the new year, arguing that the effort to de-risk portfolios in the preretirement years should actually be based on “everything going on financially outside the portfolio.”

“Start by thinking about income that you’ll get from Social Security or from a pension and use that to determine how much you’ll need to withdraw from your portfolio,” Benz suggests. “Start by maximizing those nonportfolio income sources. That in turn can help lessen your portfolio withdrawal needs. It’s also important to mind the tax consequences of any repositioning, especially if you are lightening up on equity holdings.”

Lessons From a Brutal 2022

As Benz notes, 2022 has proven to be a unique year in that equities and bonds have simultaneously performed poorly — something that has only happened a handful of times in the market’s sizable history.

That fact leaves a lot of investors who are approaching retirement scratching their heads about what to do now, and about how their portfolios should potentially be repositioned when times improve.

“Historically, when we saw stocks fall in periods of bear markets, we often saw bonds at least hold value or maybe even gain a little bit of value,” Benz says. “We didn’t see that this time around, in part because interest rates are bugging both stock investors and bond investors. Rapidly rising interest rates depress the value of already existing bonds.”

This happens because investors who hold such bonds see how newer bonds are coming online with higher yields attached to them, and they move toward the new bonds instead. That pushes down existing bond prices, in turn.