This Is Exactly How Much Retirees Like You Should Have in Stocks

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
retirement rebalancing 0

At last week’s Oxford Club Private Wealth Seminar at the beautiful Four Seasons Resort in Santa Fe, New Mexico, an attendee asked a question I’ve heard countless times before...

“Once I reach retirement, how much money should I have in stocks?”

The answer depends, in part, on your age, your health, your monthly overhead and the size of your portfolio.

So let me touch on these briefly and then provide a valuable, real-world solution. It’s called retirement rebalancing.

Americans today are living longer than ever. If you retire at 65 in reasonably good health, for example, you could be looking at up to three full decades in retirement.

Given a 20- or 30-year time horizon, you need a serious slug of equities to generate a long-term return that comfortably exceeds the rate of inflation. Because while inflation may be MIA today, that may not be the case in the future, especially a future measured in decades.

(Recall the hyperinflationary late ’70s and early ’80s.)

Yet retirees also face the potential threat of having too much money in stocks. After all, when you’re young and contributing to your investment portfolio, a bear market gives you wonderful buying opportunities.

But when you’re out of the workforce and depending on your investments to supplement your monthly pension or Social Security payments, cashing in stocks during a serious bear market - like the one we experienced in the recent financial crisis - will result in a significantly smaller portfolio when the market finally rebounds.

How do you avoid this risk? With retirement rebalancing.

Here’s how it works. Instead of thinking about what percentage of your portfolio is in stocks, calculate about how much money you need in low-risk bonds and cash to fund your monthly overhead.

Let’s say, for example, that you need $5,000 a month - or $60,000 a year - to cover the difference between any public or private pensions and your monthly overhead.

Then set aside five years’ worth of living expenses or, in this case, $300,000. Here’s why...

As I mentioned in a recent column, the average bear market in the U.S. lasts 15 months. The average decline is 32%. And the average time to recover to the old high is another 2.1 years.

So the average round trip from the beginning of the slide to full recovery is approximately 3 1/2 years. However, sometimes bear markets are more severe and stocks take longer to recover. So let’s be conservative and set aside enough money for a five-year round trip from peak to trough to new peak.

When the market is at or near new highs - as it is now - retirement rebalancing means liquidating stocks (not bonds or cash) to pay your expenses and fund those extra years of reserves.

When we’re in a bear market, however, rather than cashing in your stocks at low prices, you pay your expenses out of your five-year reserve.

If the market keeps going down the next year - and the year after - you continue to live off that shrinking reserve and refrain from cashing in your stocks at bear market prices.

When the market finally recovers to new highs, you then “retirement rebalance” once more by cashing in enough equities to restock your five-year reserve.

This is a workable, real-world solution to the perennial question of how much to keep in stocks.

What if you don’t have a portfolio large enough to set aside five years’ worth of expenses?

Then you face a different set of options:

  1. Work longer
  2. Save more
  3. Invest at a higher rate of return
  4. Set aside a slightly riskier three- or four-year reserve
  5. And/or reduce your living expenses.

But for those who have stuck to the principles we espouse here at Investment U - starting early, saving regularly and investing wisely - retirement rebalancing is an effective solution to that age-old retirement conundrum: How much should I have in stocks?

Good investing,


Thoughts on this article? Leave a comment below.

The Next Berkshire Hathaway?

Alexander Green’s Oxford All-Star Portfolio is made up of companies and funds run by some of the best minds in the money management business.

It’s brought several triple-digit returns to Oxford Communiqué subscribers.

One of Alex’s latest recommendations in this portfolio is Markel Corp. (NYSE: MKL), a very reliable insurance stock.

Here’s Alex checking on Markel back in January...

Founded in 1930, Markel is based in Richmond, Virginia. Like Berkshire Hathaway, the company has substantial interests in insurance and reinsurance, general liability, property, workers’ compensation and other product lines, including accident and health insurance.

Markel has a market cap of $12.6 billion. Roughly 60% of this represents the firm’s insurance operations. The other 40% is attributable to a stock portfolio run by Tom Gayner.

Gayner is the best portfolio manager you’ve never heard of.

Over the past 17 years, a period that includes two severe bear markets and the Great Recession, the S&P 500 - with dividends reinvested - has returned 4.2% annually. Gayner’s stock portfolio has returned 11.3% a year over the same period.

To give you a better idea of what a substantial difference that is, consider this: $100,000 invested in the S&P 500 over this period turned into $211,338. The same amount invested with Gayner turned into $670,119.

That’s all-star performance.

Gayner’s secret? He likes profitable businesses with low debt, compelling valuations, great management and plenty of opportunities to reinvest future profits.

Some of his major holdings include CarMax, Walgreens, Brookfield Asset Management, Disney, Diageo, Marriott International, Home Depot, Deere & Co, UnitedHealth, UPS, Archer Daniels Midland and Unilever.

He tends to let his winners run a very long time. With a 35% tax rate, he says, “If I sell, I have to invest the proceeds, and I’m reinvesting $0.65 on the dollar. That makes the hurdle for switching a lot higher.”

- Samuel Taube with Alexander Green

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