Riding the Roller Coaster of Risky Stocks at Retirement
School administrator Margaret Herron, 62, watched her stock portfolio plunge 31% in the first half of the year. She began buying tech stocks three years ago with the proceeds from a tax refund; now 75% of her Salomon Smith Barney brokerage account assets are in the sector.
Her holdings read like a who’s who of battered tech shares: Yahoo, down 49% from its record high; America Online, down 44%; Qualcomm, off 70%; MarketWatch.com, down 70%.
Many investors must eventually decide whether to hang on to stocks that have taken a drubbing or risk selling them at their lows.
But the stakes are particularly high for retirees and pre-retirees who don’t have decades of working income ahead to make up for mistakes they make now.
With the unprecedented surge in technology stocks in the last quarter of 1999 and the first quarter of this year, many people were seduced by tech fever. Stories are told around every office about co-workers or relatives who shifted large chunks of their retirement savings into tech stocks or tech mutual funds.
Indeed, the fund industry saw record cash inflows in the first quarter--most of that into aggressive funds.
As the tech sector has tumbled, many investors who bought in late are facing the reality of portfolios worth far less than planned. For retirees and pre-retirees, the pain can be acute.
“I feel like I’m so vulnerable,” said Herron, who plans to retire this year. “But I just love my technology stocks and I can’t bear to get rid of them.”
Herron has some advantages other investors may not: Her California State Teachers’ Retirement System pension will replace 77% of her $96,000-a-year income when she leaves her job as assistant superintendent for the Lowell Joint School District in Whittier in August.
She also has $200,000 in a 403(b) retirement account invested in two well-diversified stock funds.
So the brokerage portfolio that has taken such a beating, and is worth about $263,000, won’t be needed for living expenses. Instead, Herron hoped to use it to travel, to remodel her home and to set up portfolios for her grandchildren.
Still, the question for Herron, and other pre-retirees and retirees like her, is how much risk she should be taking in her portfolio at this age. The first-half swoon in tech stocks has made that Topic A for many such investors.
Here’s a look at some ways to approach the issue:
* Consider whether your portfolio needs reallocating.
Use the market’s first-half turmoil as a reason to assess the risk levels in all of your holdings. The mutual fund tables beginning on page S12 of this special section can help you evaluate individual funds.
With regard to technology stocks and funds in particular, you should consider whether your personal situation merits reducing your overall exposure to tech--even if your holdings are under water.
No one is questioning the long-term growth potential of technology as an industry. But many Wall Street pros note that, even after the second-quarter dive in tech stocks, many of them still are priced at extraordinary levels relative to earnings or expected earnings. That’s why the risks remain high, experts say.
One of the worst things vulnerable investors can do is cling blindly to depressed shares, hoping that they will return to their former peaks or recoup the initial investment, notes Tim Kochis, a leading financial planner in San Francisco.
“The market doesn’t know what you paid for your shares, and it doesn’t care,” Kochis said. “It particularly doesn’t care if you overpaid.”
He says that people close to or in retirement who don’t have substantial pensions probably need to lessen their portfolio’s dependence on volatile stocks in favor of lower-risk shares or fixed-income investments.
Ask yourself: Can you stomach wide market swings and still sleep at night?
If not, there are many ways to structure your portfolio to lower the overall risk. (See the accompanying story on this page.)
Some investors end up with a too risky portfolio more by accident than by design, planners say. They buy tech stocks that do well and become an increasingly large portion of the portfolio. Then the investors refuse to diversify because they are reluctant to let go of their winners or because they fear the tax consequences of selling.
Neta Gagen, a Garden Grove financial planner, says she knows one investor who put off diversifying a $600,000 portfolio heavily weighted in tech, including 20% in a single stock. Six months later, the portfolio is worth $300,000, she said.
“He didn’t want to pay the taxes” that would have been generated had he sold some of his shares, Gagen said. “He could have paid a lot of taxes with that $300,000.”
* Remember that some risks are worth taking.
Though financial advisors caution retirees and pre-retirees against becoming too sanguine about risky investments, they also warn clients not to overreact.
Even the most risk-averse retirees or pre-retirees should remember that longer life spans will probably necessitate that at least 40% of their portfolios remain invested in stocks, and probably more, planners say. That provides a needed growth component for the portfolio.
Someone like Herron, who’s in the enviable position of not really needing the money she has at stake in high-risk stocks, may not need to reallocate her portfolio, Kochis said.
“She can afford the risk of having a relatively aggressive portfolio,” he said. “She has no real reason to take that risk, but she can afford to do it if it provides something else for her, such as a sense that she’s participating in the ‘new economy.’ ”
Gagen describes her investing style as relatively aggressive and says some of her more risk-tolerant retirees have as much as 80% of their portfolios in stocks.
But she advises clients that, with regard to their technology-stock holdings, keeping that weighting to about 30% of total stock holdings--which is tech’s approximate weighting in the blue-chip Standard & Poor’s 500 index--is a good benchmark.
San Pedro commercial fisherman Tom West, 63, responded to the market turmoil earlier this year by moving much of his and wife Barbara’s nest egg into a cash account--and by delaying his retirement plans.
West moved 60% of his portfolio into money market funds in February, as the Dow Jones industrial average was crumbling--a decline that preceded the tech sector’s mid-March plunge. The rest was left in “grand old Dow stocks and good technology stocks,” he said.
The pullback in his portfolio, he said, “has necessitated continuing to work past 65. I’m lucky in that it is my own business and that I can call the shots” in that regard.
Yet West, who says the bulk of his retirement income must come from savings (supplemented by Social Security), said he has come to realize that he needs more stock exposure for the long run. He recently moved half of the money in cash back into equities, including the Nasdaq 100 trust, a stock that tracks the tech-dominated Nasdaq 100 index.
“When the market turns around, I need to be there,” West said.
* If reallocation is necessary, look into different ways to manage it.
Investors can manage the tax hit from portfolio diversification moves by offsetting stocks or funds sold at a gain with those sold at a loss, or by doing the bulk of reallocation within tax-deferred retirement accounts, if they have them. (For more information on tax-smart investing, visit https://www.latimes.com/taxes.)
In addition to selling their losers, wealthy investors who want to reduce the future impact of estate taxes might also consider giving away some of their tech-stock winners, either to charities for a tax break or to their heirs.
Investors also can try to limit their risk by hedging their portfolios through more advanced strategies, such as by using so-called put options. You may well want a broker’s help to understand the intricacies of such strategies.
A put gives an investor the right but not the obligation to sell a stock or stock index at a certain price within a set period of time. If the market price of the stock or index falls below the put price, the put rises in value. This strategy can be used to protect profits on stocks you own, or for overall portfolio protection, though you must weigh cost versus the potential benefit.
“If, say, one stock in particular has risen tremendously and it keeps you up at night, you could buy puts on just that stock,” said Robert “Rocky” Mills, branch manager at Sutro & Co. in Woodland Hills.
Most retirees and pre-retirees would be better off pursuing a simpler strategy of getting their portfolio mix of stocks and fixed-income securities right to begin with, and sticking to it, experts say.
That can be difficult if it means selling certain securities to change your mix, especially if it means acknowledging that you made a mistake.
But failing to act can have far worse consequences in the long run.
Liz Pulliam Weston can be reached at liz.pulliam@latimes.com.
