Tags: Utkus | retirees | equity | risk

Vanguard's Utkus: Retirees Best Off Cutting Their Equity Exposure

By    |   Tuesday, 11 November 2014 02:12 PM

Recent research has contradicted the conventional wisdom that you should decrease your allocation to equities as you approach retirement.

But Steve Utkus, director of Vanguard Center for Retirement Research, recommends sticking to the tried and true.

"When you're younger, if you think of your whole balance sheet, including your financial savings and the net present value of your future lifetime earnings, which we call human capital, you can imagine that at 25 you have this huge stock of human capital and this tiny retirement savings account," he tells Morningstar.com.

"And the riskiest part of your portfolio is not what you put in your retirement account, it's your human capital."

So at that point it makes sense to have all your assets in stocks.

But, "as you age, the future lifetime earning shrinks, the size of your financial capital increases," Utkus explains. "And if you want to maintain an overall risk profile, this growing pile of money has to become more conservative."

If you're looking for higher yields than investment-grade bonds but still want a degree of safety, you might consider preferred stocks, says MarketWatch columnist Jeff Reeves.

Preferred stocks are a hybrid between common stocks and bonds. They are less stable than bonds but more so than common stocks. And preferred shareholders stand ahead of common stockholders as creditors.

"That can give you a bit more yield but also a bit less risk than the alternatives," Reeves writes.

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Recent research has contradicted the conventional wisdom that you should decrease your allocation to equities as you approach retirement.
Utkus, retirees, equity, risk
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2014-12-11
Tuesday, 11 November 2014 02:12 PM
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