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Retirees, Time to Bail on Stocks?


Are you staying the course in stocks, or getting out?

After three weeks of dramatic stock market swings, and no big solutions to the Europe or U.S. debt issues in sight, a number of investors in or near retirement and financial planners we interviewed for a story in The Wall Street Journal Friday titled “Last Straw or Time to Buy?” are paring back their exposure to equities.

Laurence Montello, a certified financial planner in Palm Beach Gardens, Fla., was advising his retired clients last week to move 20% of their stock portfolios to cash and 10% into Treasuries, for example.

Early last week, Christopher Parr, a certified financial planner in Columbia, Md., reduced equity allocations in his model portfolio for retirees by 7% to 38%, raised cash by 5% to 15% and increased allocations to “other assets,” including commodities and precious metals, by 2% to 17% of the total portfolio. (He left bonds at 30%.)

“I am concerned that the market already priced in more Fed stimulus from decisions to be made during the upcoming Jackson Hole conference,” Mr. Parr says. If necessary, he could pare the investments in equities and add inverse-short funds, though “I don’t like to do that, because you’re going to miss the upside,” he says.

Mark Cortazzo, a certified financial planner in Parsippany, N.J., says he’s trying to reduce “concentrated risks” in the portfolios of clients who are nearing retirement, whether it’s one stock, one industry or one asset class, and diversify investments to include managed futures and bonds along with equities.

On Thursday, he advised a client with about 40,000 shares of Oracle Corp., on a way to hedge his concentrated position: The stock has been trading around $25 a share, and the owner wants to sell his holdings when they hit $27. So, Mr. Cortazzo suggested selling what’s called a “covered call” against the stock at $27 for 10,000 shares.

That way, the shareholder makes $2 a share now, or $20,000. If the stock has risen to at least $27 when the covered call expires on Dec. 17, the client gets $27 a share. If it has fallen in value, he keeps the stock, along with the $2 premium for selling the call.

“You’re giving up some upside, but if you’re comfortable with selling at that price anyway, this is a way of making some extra, on top of what you were willing to take, and hedging your downside risk,” Mr. Cortazzo says.

Evensky & Katz in Coral Gables, Fla., did not make changes Thursday, but its investment committee “is evaluating a potential shift in our exposure to Europe” and considering what to do with some “tactical satellite funds” that it may use to buy a depressed asset class as a result of recent declines, says Chief Investment Officer Lane Jones. The firm also is preparing to sell some bonds and buy stocks in order to realign clients’ portfolios with their target investment policy, he says.

For investors who are panicking, T. Rowe Price Group Inc. suggests putting a process in place for liquidating small portions of your portfolio gradually – such as liquidating 10% today, and then later, maybe in a week or a month, liquidating another 10%, until you “regain your emotional equilibrium,” says Christine Fahlund, a senior financial planner at the Baltimore firm.

Are you finally getting out of stocks? Or letting them ride?

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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.