Older Investors Have a Lot of Money in Stocks. How to Check if It's Too Much.

[mahatmakanejeeves]

MARKETS PERSONAL FINANCE

Older Investors Have a Lot of Money in Stocks. How to Check if It’s Too Much.

The stock-market volatility in recent weeks is denting the portfolios of many in retirement

By Anne Tergesen
https://twitter.com/Annetergesen
[e-mail]
Jan. 26, 2022 11:41 am ET

A suddenly sliding stock market is sending a wake-up call to older Americans that maybe they shouldn’t invest like they used to. Many are likely to ignore that call.

Thanks to a long bull market that surprisingly rose and rose through the pandemic, plus more than a decade of low yields for bonds, older Americans have a lot of money in the stock market. Data from Fidelity Investments’ 20.4 million 401(k) investors shows that almost 40% of 401(k) investors age 60 to 69 hold about 67% or more of their portfolios in stocks. Among retail clients at Vanguard Group between ages 65 and 74, 17% have 98% or more of their portfolios in stocks.

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[PoindexterOglethorpe]

1. If not in stock, what should older investors have their money in?

What exactly is the return on bonds?

And what is the current inflation rate?

[lastlib]

2. I wouldn't say they should be completely out of equities.....

...but reducing exposure to perhaps 30-40% will provide some buffer against inflation while preventing unaffordable losses of principal.

[PoindexterOglethorpe]

3. In reality, the payout from bonds is so abysmally low, that

being strongly in stocks makes a lot of sense in the current market.

Keep in mind that on average, stocks go up around 8% each year. Sometimes more, sometimes less, sometimes in a negative amount. But two out of every three years stocks go up.

I'm not entirely certain where the standard wisdom that older people should hardly be in stocks came about. Maybe in the 1970s when interest rates were astonishingly high, and bonds were an excellent investment. That hasn't been true since about 1980.

I know that here on DU financial advisors are generally thought poorly of. But I have one who has done me very well. He's guided my investments so that I am protected on the down side. I don't do quite as well on the upside, but overall I do very well. Example is in that sharp downturn in early 2020 when the Dow lost some 10,000 points, or around 30%. My investments dropped significantly less than that, perhaps 15%. The most important thing is that I didn't panic sell anything, because I trusted my advisor and knew I'd recover. And I did.

Meanwhile, I am able to increase my payout from my investments periodically. Which means that I am not living on a fixed income, but one that tends to accommodate increases in the cost of living.

Honestly, it's the trying to time the market, and especially the panic selling that ruins people.

Another thing that is regularly trashed here, and elsewhere, are annuities. I don't quite understand it. That same wonderful advisor got me into two different annuities nearly a decade ago. A single payment purchase in both cases. I started collecting from them several years ago, and the return on them has been quite good. Their value keeps on going up, even as I take out money. Plus, whatever is left when I die goes to my heir. I'm not likely to live long enough for every single penny to be used up. And if that actually happens, oh well. My heir will get other money from me.

[progree]

4. Most financial advisors that I've ever heard of, read columns from, etc.

don't advocate 100% stock ownership, but rather a mixed stocks to fixed income allocation that varies by age.

Including yours, as annuities are considered to be in the fixed income category, even hybrid ones, thanks to a guaranteed minimum.

You wrote once that at the beginning, this financial adviser put about half of what you had into two annuities. That helps cushion you from falls in the stock market, as you wrote -- "in early 2020 when the Dow lost some 10,000 points, or around 30%. My investments dropped significantly less than that, perhaps 15%".

This advice to have some assets in fixed income is also backed up by innumerable simulations in AAII Journal and elsewhere by many different authors or retirement savings where the person is dependent on drawing upon the savings a certain amount a year (the classic example is withdrawing 4% in the first year, and increasing the withdrawal by the inflation rate each year). High allocations to equities do the best in terms of number of years to depletion, but not the highest.

I was 89% in equities as of 2018 or so (IIRC), and I found that I couldn't stomach nearly 9 out of 10 of my investible assets being subject to pullbacks like 1929 (89%, with a 25 year recovery time), 1974-75 (48%), dotcom (49%), or housing bubble (57%). Or the Nikkei 82% peak-to-trough, and which is still well below its year-end 1989 level of 32 years ago. Or a 14 year recovery times in the S&P 500 like in 1968-1982 (which included the 1974-1975 48% pullback). Particularly given that I don't expect to live that long, given my gender, age, and health.

As for "the current market" - yeah, in the current market (meaning the market overall since March 2009 and leaving aside the past month's mild downturn), yeah, 100% equities would have been the greatest by far. It's when the market isn't like the current market is when there is a problem, like outliving greatly depleted assets in the worst cases during prolonged downturns.

The stock market is at historically very high values according to common measures like the Case-Shiller P/E ratio and the total equity market value to GDP ratio.

That equities are relatively very high-valued compared to historic levels is not surprising given the poor returns of their main competitors for investor dollars -- bonds -- compared to past historic levels. As long as this continues, I expect stocks will continue to do well and continue to have very high P/E ratios compared to historic averages. But if there is a sustained secular rise in interest rates (something we haven't seen since about 1981), all bets are off.

[PoindexterOglethorpe]

5. No one is suggesting 100% stock ownership.

No one.

The 89% in equities you say you had in 2018 was well above what sensible advisors suggested. And 100% equities is foolish even for a very young investor.

My investment advisor tells me that stock market valuations are not all that high, and that stock prices overall are not out of line with historic values.

But what does he know? Right. All I know is that for some twenty years now he has not led me astray. I'm sticking with him. Perhaps more to the point, the annuities he had me buy are giving me financial security. The current payout I'm taking from them is somewhat above the 4% that is considered the industry standard.

[progree]

7. I thought I read, "If not in stock, what should older investors have their money in?"

Last edited Tue Feb 8, 2022, 02:36 AM - Edit history (3)

as a reply to an OP titled, "Older Investors Have a Lot of Money in Stocks. How to Check if It's Too Much."

You replied,

"If not in stock, what should older investors have their money in? What exactly is the return on bonds? And what is the current inflation rate?"

That sure sounded like advocating a 100% allocation in stocks to me, and none in bonds (most here know that intermediate corporate bonds are yielding a very miserly 2 to 3% rate or thereabouts, Treasuries even less, well below the inflation rate. You characterized bond yields as "abysmally low" in #3. As compared to an 8% average annual return in stocks that you mentioned in #3). Though I suppose you can say you were just asking questions and not advocating anything.

Anyway, I'm very glad we got that cleared up.

"The 89% in equities you say you had in 2018 was well above what sensible advisors suggested"

Yes, the equity ratio drifted above my target, obviously I thought it was too high too. I'm about 60-40 now which is higher equity than most advocate for my age, but then as you indicated up thread, given the dismal returns in bonds, the allocation percentages need to be rethought. There are many articles in the past few years suggesting the same thing -- increasing the stock-bond allocation compared to the old thumb-rules.

But allocation decisions are mostly a matter of risk tolerance. The simulations I've seen, for hypothetical people at 65 is the mix that will allow a portfolio to last the longest in the face of withdrawals. Those were mostly around 80-20 equity to fixed income.

"My investment advisor tells me that stock market valuations are not all that high, and that stock prices overall are not out of line with historic values"

The P/E ratio is not out of line with historic values? The total stock market valuation to GDP ratio is not out of line with historic values? Is he really telling you that?

But I suppose, given that he is selling you equity investments, what else would he say?

https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart
https://www.multpl.com/shiller-pe
https://fred.stlouisfed.org/graph/?g=qLC
For some reason, the last one above defaults to an end point in 2014. Click the MAX button to see the whole thing.

Given the historically high valuation of the stock market, both Vanguard and Schwab project about a 3.5% return for equities over the next decade. And this does not assume a big change in inflation or interest rates. (Unsurprisingly, bonds are projected to do even less well).

"the annuities ....The current payout I'm taking from them is somewhat above the 4% that is considered the industry standard."

As we discussed in https://www.democraticunderground.com/11213049 at great length, you bought your annuities back in 2012 when annuities (and bonds) had higher yields than currently. And the "yield" on annuities includes a return of principal, so they aren't comparable to a bond's yield. How well you do in annuities depends on how long you live. How well I do with my annuity depends on how long I live.

[PoindexterOglethorpe]

9. For about five years now people here have been saying the market is overvalued,

it's going to crash any day now, so sell everything!

We've had various corrections, but no huge crash. Yes, the market goes up and it goes down, but the overall trend is up. I don't pay much attention to P/E ratios, but a lot of companies are making money. That's what's keeping stock prices up. Perhaps I should care more about that, but note that during that long terrible time when the market was recovering from the Crash, was when the P/E ratios were at their lowest. And that huge increase in '07 and '08 was, if I recall correctly, fueled mainly by overvalued tech stocks, a classic bubble.

I've been with my advisor some twenty years now. I am a very long way from being his most lucrative client, but he has served me very well. He does not churn my account. It's all in funds, which occasionally get changed as he feels one fund is no longer a good investment but a different one is. He keeps me apprised of what's happening, especially with my account. I actually look at it every single day, just to keep track. I also frequently make use of this site regularly: https://www.calcxml.com/do/how-long-will-my-money-last

It's quite interesting. It defaults to an 8% growth, which I always reset to 6%. And so far, my money should last me far longer than my life span. Which is quite nice.

It seems to me that entities like Vanguard and Schwab have been predicting a relatively low return on equities for about a decade now.

Apparently there are annuities out there that die when the holder dies. Mine don't. Any residual value goes to the beneficiary. Also, a quick look at them, one is 50% invested in stocks, the other about 20%. The first one has increased in value noticeably more than the second, but I have peace of mind with both of them.

[progree]

10. Yes, historically the market has gone through long periods of high valuations before crashing

no particular surprise to me on that score.

For about five years now people here have been saying the market is overvalued, it's going to crash any day now, so sell everything!

Yup, a lot of people have been saying its overvalued for a lot longer than that around here and especially the Economy Group. I think its overvalued too except for one thing -- the interest rates and overall return on stocks main competitors -- bonds -- is so low. So people who would normally have bought say 60% stocks and 40% bonds instead say screw the bonds and buy a much higher proportion of stocks. That's what's pushing stocks to sky-high P/E ratios.

Unfortunately I haven't seen any attempt to come up with a version of a P/E ratio that includes a component that takes into account the interest rates on competing bonds, so I don't really know what they "should" be. That said, I think its still overvalued.

I've never been one to say "sell everything". But yeah, that's been what they say in the Economy Group. Along with the Wall Street Casino and the House always has the edge. I don't say those things. As I've written many times in this forum, including recently, I don't know when the market will turn, and I don't want to miss out on more doublings for fear of a TEMPORARY halving.

a lot of companies are making money. That's what's keeping stock prices up.

There are almost always a lot of companies making money. That doesn't ALWAYS keep prices up though.

Stocks are generally considered a leading indicator. Generally they start on their big downturn many months or more before the economy starts to go into recession. And at the other end, they bottom out and turn up many months before the economy start to improve.

We've had various corrections, but no huge crash. Yes, the market goes up and it goes down, but the overall trend is up.

Yes we've been lucky in the last few decades. Nothing here like the Nikkei 82% peak-to-trough crash, and that, 32 years later, still hasn't gotten back to where it was. Nor of course the 1929 crash, 89% peak-to-trough that took more than 25 years to get back to where it was. Or the 14 year recovery time from 1968 to 1982 that included a 48% peak to trough crash in 73-74.

but note that during that long terrible time when the market was recovering from the Crash, was when the P/E ratios were at their lowest. And that huge increase in '07 and '08 was, if I recall correctly, fueled mainly by overvalued tech stocks, a classic bubble.

I'm not following - the '07 and '08 was the housing bubble crash, not a tech stock crash. The S&P 500 peak was 10/9/07 and the bottom was 3/9/09.

The dot com crash was from a peak on 3/24/00 to a bottom of 10/9/02.

Anyway, P/E ratios are usually at the lowest near the bottom. Prices are certainly the lowest at the bottom. Earnings at some points crash even worse than stock prices at times which actually drives P/E ratios to blip up temporarily.

It seems to me that entities like Vanguard and Schwab have been predicting a relatively low return on equities for about a decade now.

Dunno, I haven't been tracking those predictions. They've also probably been predicting good returns before crashes too. They've been wrong in both directions. I'm just saying they too think prices of stocks are very high relative to earnings.

Apparently there are annuities out there that die when the holder dies. Mine don't. Any residual value goes to the beneficiary. Also, a quick look at them, one is 50% invested in stocks, the other about 20%. The first one has increased in value noticeably more than the second, but I have peace of mind with both of them. .

So you got a hybrid of an annuity with an equity component at a time when annuity yields were higher than now, and at a time when the stock market was much lower compared to now. I don't know when in 2012 you got it, but taking the midpoint, on 6/29/2012 the S&P 500 closed at 1362. Yesterday, 2/7/22, it closed at 4484. That's a 3.29 fold increase over 9.6 years. That's a 13.2% annualized return, not including dividends, which would probably add another close to 2% on top of that. Congratulations.

Edited 2/13 to remove some incorrect overgeneralized statements about P/E ratios. This explains some of why P/E ratios may vary quite a lot with market conditions, and why the Case Shiller ratio is more consistent: https://www.gurufocus.com/shiller-PE.php

[lastlib]

6. I largely agree with you. It's a matter of risk tolerance, I think.

When Pres. Carter appointed Volcker to the Fed, interest rates skyrocketed as the Fed worked to squeeze inflation out of the system. It was painful to many who couldn't finance home purchases, cars, etc., but I think that policy had more to do with the economic boom in the '80s than raygun's tax cuts. As inflation diminished, the Fed lowered interest rates in the mid- to late 80s, and bond returns headed down, making stocks more attractive. That has pretty much been the case ever since. Bonds now are more for safety than for growth. Folks who have trepidations about stocks need to have more weight in fixed income investments, but they need some exposure to stocks to mitigate inflation risk. Like the old saw goes, if your investments keep you awake at night, you have too much risk.

As for annuities, I look at them as income insurance. People with high incomes but have a risk of losing that income should have annuities to fall back on. Big-time athletes, who could lose their earning potential with a career-ending injury, or entertainers who could fall out of favor, are good candidates for annuities. I don't necessarily recommend them for people who have steady jobs with some long-term security. If they have the money to spare for an annuity, fine, but otherwise I wouldn't be a fan of them.

My 2cts. YMMV

[PoindexterOglethorpe]

8. I don't have a high income. My annuities are simply part of

a very modest income. So they are definitely not just for those with a high income.

[at140]

11. There are bold traders, and there are old traders in stock market

But there are no old bold traders.

The stock market is over-valued for 2 reasons. first the inflation has been low in current years and that resulted in low bond yields. That caused investment money to flow into stocks. Second and more important reason is excessive money printing in DC. Just add up the federal budget deficits for last dozen years. That excess money was not saved, it was spent. Money is like water, it always seeks the final level, for water it is gravity induced lowest level, for money it is stocks.

If the inflation turns out to be not transitory as chair of Federal Reserve forecasted just a few months back, then that will be the Achilles heel for the over-valued stock market. If inflation turns out to be indeed transitory, market can remain at historically high PE's.