Are You Living By Old Rules of Equity?

The American College of Financial Services
May 4, 2020

For many retirement planners, prevailing wisdom over the years has been that the equity allocation in a portfolio should be 100 minus the client’s age. Even if an advisor doesn’t follow this particular rule to the letter, it’s been conventional wisdom that the appropriate amount of equity allocation decreases as age increases. With your clients living longer and becoming more prone to health, mobility, and financial issues, why run the risk of losing money in their portfolio when you could slowly reduce the amount of risk their assets are exposed to in the marketplace?

Except upon closer inspection, the facts don’t bear this assumption out. Research by expert retirement planning faculty from The American College of Financial Services and across the financial services profession show that gradually reducing equity exposure in the portfolios of retirement-bound clients doesn’t improve income sustainability: it may actually have the opposite effect.

According to a 2007 study by adjunct wealth management professor David Blanchett, static asset allocation—usually in a balanced portfolio where 60% of assets are equities and 40% are fixed income—proved to be very efficient in maintaining value throughout clients’ retirement years. Blanchett found there was no connection between dynamic glide paths for retirement planning and better performance of those assets: while there were cases in which dynamic planning worked better than a simple unchanged asset ratio, overall the efficiency between static and dynamic methods were quite comparable, and the 60/40 balance was identified as one that could be the best choice for most retirees.

Furthermore, in a 2013 study, Retirement Income Certified Professional® (RICP®) program director Wade Pfau found that actually increasing equity allocation in portfolios through retirement might be the right move for many advisors in reducing the failure rate of their clients’ portfolios and improving retirement outcomes. While Pfau indicates annuitizing at least part of a client’s portfolio is probably a good idea, the gains in many retirement portfolios that were attributed to increasing fixed income assets were actually the results of a bucketed liquidation strategy in which growing equity in a portfolio allowed value to rise. The study revealed that not only are glide paths that pare down equity potentially harmful to the long-term strength of a retirement portfolio, but ones with rising equity allocations could actually be beneficial.

You may be wondering what bearing the ongoing COVID-19 pandemic has on this advice: the short answer for most financial advisors is, not a whole lot. While every client and retirement planning situation is different and the economic downturn has rattled many investors’ confidence, the general consensus among experts is cashing out of a retirement portfolio now is a mistake. If clients were comfortable with a higher-risk investment strategy before going into this period of upheaval, they may want to consider staying the course. No matter the situation, selling off assets at a loss could jeopardize long-term plans just as surely as doing nothing.

You want your clients to be in the best position to take advantage of the eventual market rebound: perhaps now could even be an opportune time to pick up some more undervalued stocks and give their financial plan stronger legs. Counseling your clients to ride out the current downturn and stick to their investment strategies is likely the best way to protect their plans for the future.


Help Clients Plan the Most Important Phase of Their Lives


Roughly 10,000 Baby Boomers are retiring every day: some with large nest eggs that need expert management skills, and others with income needs that will last through their retirement years. No matter which needs your clients have, The American College of Financial Services is here to help.

You can read more in The Guide to Being a Successful Retirement Income Planner. It’s a comprehensive look at 10 points every financial professional should be aware of when approaching clients in their retirement years.

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Baby Boomers are retiring at an unprecedented rate, meaning that more and more Americans are facing the challenge of using their investments to maintain their quality of life. For them, the usual investment advice no longer applies. They need the unique strategies you can learn through the three-course Retirement Income Certified Professional® (RICP®) designation program. Help your clients thrive while growing your career.

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