The 3 Steps You Must Take With Your Retirement Portfolio Right Now


By Walter Updegrave, RealDealRetirement @RealDealRetire

If you haven’t reflexively jettisoned stocks from your retirement portfolio in the face of the market’s recent wild swings, congrats. Panic is never a smart financial move. But staying calm in periods of upheaval may not be enough either. To really get your retirement portfolio in shape for the future—whatever it may bring—you need to take these three key steps.

1. Take stock of all your holdings. To choose the right path going forward, you need to know where you stand now. Start by toting up the current value of all your retirement investments and calculating the percentage that is in stocks and in bonds. This should be a pretty straightforward exercise. But if you own funds or ETFs that own a combination of stocks and bonds, you can figure out the percentage of each by plugging the fund’s name or ticker symbol into Morningstar’s Instant X-Ray tool.

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You can do a finer breakdown if you like—small vs. large stocks, international vs. domestic, short- vs. intermediate- or long-term bonds, etc. But the main thing is to get an accurate overview of your current asset allocation, since the split between stocks and bonds will largely determine how your portfolio will fare in the future, regardless of whether the market declines or surges.

2. Re-assess your risk tolerance. Even if you’ve done a risk assessment within the last few years, it makes sense to do another given the market’s recent volatility. The reason is that many investors underestimate the true risk they’re taking in stocks when the market is surging, as it has done over most of the past six or so years. That miscalculation can lead investors to invest more aggressively than they should, a problem that becomes apparent when the market heads south and they realize they’re in over their heads and begin unloading stocks in a hurry.

So take this time to do a quick gut check. Specifically, you can complete Vanguard’s free 11-question risk tolerance-asset allocation questionnaire. This tool will help you estimate how much of your portfolio should be in stocks vs. bonds based on, among other things, how large a setback you feel you could handle without dumping stocks wholesale and how long you expect keep your money invested. More important, you will come away with an assessment your tolerance for risk that reflects the realities of today’s precarious market.

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3. Get your portfolio in synch with your gut. The Vanguard risk tool will also recommend a specific blend of stocks and bonds that’s appropriate given your appetite for risk. You will then want to see how that suggested mix compares with how your retirement portfolio is actually invested today. Unless you’ve been rebalancing your holdings regularly, you may very well find that your portfolio has become much more heavily invested in stocks over the past five or six years, a natural consequence of the fact that stocks have outgained bonds by a margin of nearly seven to 1 since the market’s trough in 2009.

If for whatever reason you find that there’s a big disconnect between your portfolio’s asset allocation and the one recommended by the risk-assessment tool, you must decide how to reconcile the difference. One way to do that is calculate how each portfolio would have performed in a past severe downturn such as the 2008 financial crisis when stocks lost almost 60% of their value and bonds gained roughly 8% from the market’s high in late 2007 to its low in early 2009. You can then consider which you’d be more comfortable holding if the market spirals downward from here.

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On the other hand, going with the portfolio that will hold up better under duress could leave you with a portfolio mix that can’t generate returns large enough to build an adequate nest egg. If that’s the case, you may want to sacrifice a little short-term security for a shot at loftier long-term returns with a higher octane blend, even if that means having to ride out some scary downturns. You can get an idea of how likely different portfolios are to give you a shot at a secure retirement by plugging different mixes of stocks and bonds into a good retirement income calculator that uses Monte Carlo simulations to make its projections.

There are other things you can do to get your portfolio in shape for a possible market downturn. For example, you might take this time to rid your portfolio of any investments that seemed to make sense at the time you bought them but on further reflection don’t really fit into your overall strategy (although beware that selling in taxable accounts could trigger a taxable gain). Similarly, you may want to consider unloading funds with high annual expenses, as annual charges that may have seemed insignificant while the market was soaring may represent an unacceptable drag on returns when the market stalls or declines. Once you’re confident you’ve got your portfolio where you want it to be, you may also want to go further and crash-test your overall retirement strategy to determine whether your retirement plans would hold up during a prolonged market slump.

The most important thing for now, though, is to go through the three-step process I’ve described above, and do so sooner rather than later. Because your options for containing the damage will be much more limited if the market’s recent unruly behavior turns into a full-fledged rout.  (8/24/15)

Walter Updegrave is the editor of RealDealRetirement.comIf you have a question on retirement or investing that you would like Walter to answer online, send it to him at You can tweet Walter at @RealDealRetire.

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