Pete the Planner: Your risk tolerance, objective should match your portfolio

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Peter DunnDear Pete,

I am a 72-year-old retired widow. I have $2,296,300 in the stock market; $414,350 of that is in a money market making 5.20% a year. I receive $3,000 Social Security a month, along with four different gas and oil royalties. I never have to get into my investment money.

I have become beyond fearful of what is going on in the world and want to take all my money and also put that in the money market. This last year, I made $109,000 in the stock market and, at 5.20%, I would make more than that yearly. My broker said that was a “really” bad idea.

What are your thoughts? If there is a market crash, I’d be devastated. Maybe leave 10% in the market and let that grow? Any advice would be so helpful. It is hard trying to do this on my own without my husband. Thank you for your time.

—Libby

Libby, I’m sorry about the loss of your husband. It must be quite difficult struggling through this scenario without him, especially when you know he would have likely made the situation easier to deal with. May his memory be a blessing.

I’m very thankful you wrote to me. Your question, and hopefully my answer, will serve many other people going through difficult times. It’s easy to let all the elements of your story combine together to make one hairy, unsolvable problem, but I believe your situation primarily is a case of investing against your risk tolerance and a naturally changing investment objective.

Let’s tackle the risk-tolerance problem first.

I love Nashville hot chicken. I don’t know if you’ve ever had it, Libby, but it’s addictive. First, it burns the tongue out of your mouth. Then it offers a unique and delightful flavor combination. Then, in its final act, it burns your face, nose and eyes for a few minutes. I highly recommend it.

What? That doesn’t sound appealing to you? To each her own, I guess.

This is risk tolerance. I’m willing to risk various bouts of discomfort in order to experience the pleasure of Nashville hot chicken. My talking you into trying it once isn’t ideal if you won’t enjoy it. Asking you to consistently consume it, just because I enjoy it, is borderline cruel. My comfort with it can get you only so far.

Besides, there is a lot to be fearful of right now. In my first draft of this column, I listed a handful of world issues, political issue and economic issues that would give even the most aggressive investor pause. The list felt so egregious that I struck it.

So I’ll just hit you with one major issue—the average American household has not yet figured out that it’s out of money. The unquenchable consumer thirst developed in 2020 has blown through government stimulus payments, savings and credit lines. Combine that with rising interest rates and consumer prices that stubbornly won’t come back down, and you’ve got yourself a pretty gross recipe. Like I said, I left the bad stuff out.

The second important concept here is investment objective. In other words, what is your goal for your investments? At one time in your life, I’m guessing your objective was growth. You wanted your account balances to get bigger in the hopes those balances would provide you optionality in the future. Welcome to that future. You’ve achieved optionality. However, now your primary objective for your money has changed. Therefore, reallocating your investments to reflect your new investment objective is prudent.

I’m sure your adviser means well. He’s likely concerned with the tax burden your changes could create. He might even be thinking of the opportunity your nest egg presents to your future generations. And I definitely know his mind is on his belief the equity markets will outperform a money market account over the next decade or so. But do you know what? Maybe you don’t like Nashville hot chicken.

Is your adviser correct after the market, the future and the tax ramifications? Possibly, if not probably. Should you do what he says in this scenario? Probably not. Your risk tolerance and investment objective don’t match your portfolio. You need those elements to align. If your adviser pushes back too much, ask your friends for a referral to their adviser.

One last note. Start taking a friend to your financial-planning appointments. You won’t feel so alone.•

__________

Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.

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One thought on “Pete the Planner: Your risk tolerance, objective should match your portfolio

  1. Pretty much solid advice. I would probably point out that selling 90% of her equities may end up costing a ton in taxes and may be worse than if the market tanked by 20% or more. I know Pete mentions taxes, but a little probing may be in order. First, if it’s in a retirement account, then there are no tax implications to reallocation. If it’s in a taxable account then I might suggest she sell many of the investments with the least capital gains. And she may be in a sweet spot of some retirement accounts and some taxable accounts – if so , then purge the equities in the retirement account at will. I imagine she’d sleep just fine if she took half of her $2.2 nest egg off the table. It’s also worth mentioning she says she doesn’t even need the $2.2M to live on now, so it would be okay if she took some chips off the table but doesn’t need to be worried about leaving some in the game if she doesn’t need it anyway.

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