We all have been born to extremely conservative parents and grandparents. Today, when the markets and economies have turned more liberal, opening up a wide variety of investment avenues, many of us are comfortable with risky investments. We also often ignore the need to conduct strategic realignment of our portfolios at regular intervals.

Taking risks while young is acceptable as we have the time and energy to compensate for the financial damages. But when we approach retirement, it is the time to change the rules, sometimes, the game itself. We can’t put our money into risky assets. More than that, a portfolio rebalance becomes necessary.

Here we list five reasons for the strategic rebalance of your portfolio to reduce investment risk when you come close to your retirement.

1. Sharp market drawdowns could deplete your funds: As you cross the 60-year mark, your risk appetite decreases. More than that, a single sharp downtrend could wipe away a large portion of your fund if you held it in risky assets. So even the timeline may not support your efforts to rebuild your portfolio to its previous levels.

2. Fund withdrawals should be systematic, not strategic: Post-retirement, your portfolio should support your household expenses. Therefore, you should make systematic fund withdrawals (not according to market conditions) from your portfolio to keep up with your lifestyle post-retirement.

3. You can’t take financial stress: Financial stress is detrimental to your physical and mental health. So, it is always best to build and keep a safe portfolio during the age of fragile body and mind. It can reduce your stress levels and is crucial for healthy and peaceful retirement life.

4. Need for liquid emergency funds: With old age comes health issues and medical emergencies. Hence, you should build an emergency fund to pay these unforeseen medical expenses and hospital bills.

5. Trustworthy cash flow for stress-free old age: The portfolio you build using your hard-earned money during your young working years should create a dependable monthly cash flow that provides stress-free old age.

Challenges in Rebalancing Your Portfolio

Three significant challenges are associated with rebalancing your portfolio when you approach retirement. 

1. Making A Living Out of Your Portfolio Returns: Ideally, you need to build a portfolio that will provide you with a steady cash flow. This portfolio should also ensure that your fund does not erode during your lifetime.

However, this is a very tough task, given that the returns and inflation rates wouldn’t always be consistent, and your market ideas wouldn’t be entirely up to the mark. Therefore, creating enough capital in your portfolio and making realistic market assumptions is essential.

2. Evolving Markets: The markets and the macroeconomic conditions constantly evolve with unprecedented peaks and steep troughs. No portfolio protection measures like hedging and diversification may be helpful at certain times. Hence, a well-calibrated investing approach to portfolio management is required as you walk near your retirement.

3. Evaluation of Your Retirement Lifestyle: This is one of the most significant aspects of your portfolio management when you approach retirement. It is tough to comprehend how you plan to lead your life 10, 20, or even 30 years down the line. So, you will be required to identify your expenses and revenue during your retirement period. The assets in your portfolio should be aligned accordingly.

A Few Pointers for Asset Allocation When You Approach Retirement

• Reduce Equity Assets: When you approach retirement, you must strategically move your equity holdings into debt assets. Moreover, this transition of assets should be done over a longer timeframe. It may be unwise to move your equity assets in one go. Instead, you will have to carry out this activity in phases. Remember that the exits from equity holdings should be during an up-trending market.

• Create Liquidity: The transition of equity funds to debt funds could serve as an emergency fund. Having liquid emergency funds has utmost significance during retirement. In addition, it would help you deal with medical emergencies during your retirement.

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• Safeguard Your Health and Life: When you age, health risks turn higher. During your young working years, you should take measures to hedge your life and health, such as health insurance which may cover your medical expenses during retirement. The sooner you get insurance, the waiting period will be over by the time you retire, and the benefits will be available when you need them most. It would also be wise to get life risk insurance early on in life, which offers coverage up to your maximum age.

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This article may guide you to rebalance your retirement portfolio so that it helps you lead peaceful golden years. In case you need any further assistance, never hesitate to contact the registered financial advisors to assist you.

Justin Raj

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Alpha Research