What’s worrying Suze Orman?
Based on your age and where you’re at in your career, Orman usually recommends you have 65% of your holdings in stocks and 35% in high-quality, short- or intermediate-term bonds.
For those who have a more hands-off approach to managing their retirement accounts, it’s possible the hot market over the last few years has meant the balance of your holdings has shifted on its own.
“Over the past five years, the S&P 500 stock index has more than doubled. For the past 10 years, it has nearly quadrupled,” says Orman. “If you have left your portfolios on autopilot, that could likely mean that you now own more stock than you intend to, or should.”
Left to their own devices, your increasingly valuable stocks may have started to account for an even larger portion of your account. Instead of a 65/35 split, Orman says you may now be looking at 78% stocks and 22% bonds.
Why is that a problem?
Your investing strategy should be adjusted or realigned as you get closer to retirement. When you’re younger or earlier in your career, you can afford to make riskier investments.
But, Orman says, "as you near retirement you want to make sure you are taking the right amount of risk, and not too much (or too little).”
Orman cites a recent analysis from Fidelity Investments on the retirement plans the company handles. Fidelity estimates about 20% of savers own more stock than they'd recommend for someone of their age.
And Fidelity found that it’s the generation closest to retirement age — baby boomers — who were most likely to have too much stock in their portfolio.
The concern here is that if the stock market takes a dive right before you’re set to retire, you may not have the luxury of time for it to sort itself out before you need to count on those funds.
What you can do about it
Your first step should be to take a look at the balance in your portfolio. If it’s been a while, chances are good that you’ll need to move things around.
“The great news is that it is so very easy to rebalance your portfolio to get it back to your target allocation. Money inside a 401(k), 403(b) or Individual Retirement Account (IRA) can be moved around without having to worry about any tax bill,” Orman says.
As for what you should invest in, Orman is very clear that you should pick high-quality bonds.
Even though high-yield bonds provide more income, they can be as volatile as stocks when the stock market takes a tumble, making them a riskier choice when that’s exactly what you’re trying to avoid.
Not so long ago, adjusting your portfolio meant trying to get your adviser or broker on the phone and waiting for them to fulfill your order. Now, in the age of investing apps for your smartphone, you can easily set up and rebalance your own portfolio with only a few taps of your finger.
“Now is an especially smart time to do this,” Orman wrote.
“None of us knows what is in store for stocks, but what we do know is that stock values are at record highs. They may well go higher. But we shouldn’t be surprised if there is a market decline either.”
What else can you do?
No matter how hot or cold the market is, or how much savings you already have, there's always more you can do to make sure you have all the cash you need — and then some — come retirement.
Invest what you can spare. Making money in the stock market doesn't require that you be a financial expert or obsessive. By downloading a popular app that automatically invests your "spare change" from everyday purchases, you can set up a portfolio that grows steadily in the background — while you concentrate on the rest of your life.
Ensure you’re getting the best price on insurance. By shopping around for the cheapest policies, you could potentially trim $1,100 off your car insurance costs this year. And while you’re at it, why not cut your homeowners insurance bill by another few hundreds of dollars a month, too?
Refinance your mortgage and save hundreds. If you took out a mortgage as recently as a year ago, refinancing to one of today’s low mortgage rates could save you a huge chunk of change. Some 14.1 million homeowners have the potential to save $287 per month by refinancing their loan, says the mortgage technology and data provider Black Knight.
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