Business & Real Estate

Nest Egg: Are baby boomers taking on too much investment risk?

Baby boomers are taking on too much risk: That’s what Fidelity Investments is implying in a study of its clients’ retirement accounts released late last year. Fidelity discovered that nearly 40% of 401(k) plans owned by workers born between 1946 and 1964 maintain an allocation to stocks that is higher than Fidelity’s recommended allocation for investors in those age groups. And nearly one in 12 has all of his or her retirement savings in equities.

Is Fidelity correct? Are baby boomers heading for a fall?

Let’s look at Fidelity’s benchmark for stock allocation percentage by age. The company’s target-date Freedom funds start at a 90% stock allocation for a 25-year-old investor. As the investor ages, the percentage allocated to stocks decreases. It’s just under 70% for those within 10 years of retirement (age 55), and further declines to slightly over 50% for a 65-year-old retiree.

Managing risk

Are these appropriate benchmarks? If you believed that everyone at age 50 should have the same allocation to stocks, then you could consider Fidelity’s stock allocation model to be reasonable. But stock allocation is just part of a broader balancing act between asset preservation and growth, also known as risk versus return, and realistically achieving that correct balance in an investment portfolio should be more a function of one’s current savings and future goals than it is of one’s age. A 50-year-old planning to retire at age 55, for example, should have a very different allocation strategy than another expecting to work until age 70.

Whether or not Fidelity’s benchmark is useful, those boomers who have all their 401(k) assets in stocks may very well be taking on too much risk. Despite the “temporary” COVID collapse earlier this year, equity asset prices currently remain well above their historical averages. Regression to the mean, a commonly accepted tenet in the investing world, suggests that at some point in the future, stock prices are likely to drop quite a lot. And a 401(k) invested 100% in stocks is likely to experience the same degree of collapse (if not worse) than the market at large. Of course, the investors Fidelity reviewed may own other investment accounts not held at Fidelity, so their overall portfolio might be better balanced. Let’s hope so.

It is worth paying attention to this report because Fidelity, one of the largest retirement benefits administrators, has access to a sample size on the order of 30 million accounts. Are they being too alarmist? While I’m not convinced they’re using the most relevant benchmarks, I appreciate their contribution to the dialog about managing risk, especially during a time when investors may have become too complacent about it.

I think it’s wise for every investor to apply a contrarian view. When markets are growing, start thinking about adding protection and/or reducing exposure. When markets are struggling, start looking for buying opportunities.

The worst thing you can do is invest your money and then ignore it. A 60/40 stock/bond portfolio in 2008, left untouched, would have turned into an 80/20 portfolio today. There’s truth in the adage “If you don’t rebalance your portfolio periodically, the markets will do it for you.”

Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, email This email address is being protected from spambots. You need JavaScript enabled to view it..

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