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There’s an old adage that if you’re approaching retirement, you should get out of stocks. Here’s why that theory is wrong.
You’ve probably heard the admonition against putting your money in stocks as retirement nears. Cash is safer, the theory goes. And if you’re watching the stock market right now, you’ve seen the kinds of dizzying swoons that serve as a painful reminder that holding stocks can produce sudden and significant losses.
But does that really mean that anyone in or near retirement should stay out of the stock market?
In short, not really.
The real answer for how aggressively you should invest in your later years depends more on your individual circumstances than on the fact that you’re about to retire.
Here are some things to consider:
Retirement can be long. Even as more people work longer, increased life expectancy means many people will still be in retirement for decades. That’s years, if not decades, that you’ll need enough money to live on. But it’s also more time to grow your assets.
Retirement is, in many ways, a beginning. And depending on your own timeframe, resources and needs, retirement can be an excellent time to invest for the long haul, to help ensure all your later years are comfortable and satisfying.
Bear markets are comparatively short. From the trough stocks hit in early 2009, it took the S&P 500 index about four years to recover, effectively doubling in value. Four years is a significant length of time, but for a person young in their retirement, it’s not an eternity.
If you don’t need all of your assets right away, it’s four years that you may be able to regain your losses, or invest for your later retirement years. For many investors, the period between 2009 and 2014 was a time to make a lot of money.
You (hopefully) won’t be using all your assets in your first years of retirement. The advice to conserve your assets in retirement is rooted in the very sage notion that you don’t want to gamble with money you’ll need in the short term.
So, if you need money to put a down payment on a house in the next week, month or year, you should probably keep that money in cash. If you have a high-school senior, your first goal should be to preserve that college fund. On the other hand, if you’re reaching the end of your working life and have a hard-earned nest egg, you really need to think about the short, middle and long term.
In the same way that avoiding stocks at 25 or 35 can cost you significant gains, if you avoid stocks altogether in retirement, you’re likely to miss out on some strong bull markets.
Control your emotions: liquidating rarely makes sense. Any shift from stocks into cash should be well-planned and, ideally, gradual, not done in an emotional, knee-jerk reaction to sudden drops in the market. Retirement is a time to be relatively prudent with your assets … but selling your stocks in response to a market sell-off is not really a prudent move.
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