Inside Tucson Business: How much risk should a 40-year-old investor take?

How much risk should a 40-year-old investor take?

By Steve Dinnen, Christian Science Monitor
Published on Friday, May 29, 2009

Q: I’m 40 years old and employed full time. I contribute $1,200 monthly to my deferred compensation 457 plan. My investment portfolio is allocated based on my age, meaning it’s still pretty aggressive, with a lot of stock funds. The value of my 457 portfolio has fallen into a wretched abyss and my question is: Should I move a portion of it into “safer” territory now, or should I wait it out? I have a good 15 to 20 years until I can retire. I get advice that I should more actively manage my retirement 457 portfolio, but then I’m also stretched thin with small children and professional commitments. The same scenario applies to my kids’ college funds (in 529 plans). One has eight years until college, the other has 12 years.

C.J., via e-mail

A: The good news for your 457 is that you have time on your side for your portfolio to recover, says certified financial planner Conway Halsall, of Vienna, Va. And since you have been making regular deposits into your account on a monthly basis, when the markets recover – and they will – you’ll discover the average cost per share of your investment is much lower, he says.

In the meantime, assess your current risk tolerance and how you emotionally are dealing with the market’s volatility. If the swings in the market and the idea of future declines have become too much for you now, you may wish to reduce some of your market risk.

Halsall says you can pick a target age for retirement that’s sooner than what you previously considered. By doing so, you’ll be using a portfolio that has more bond exposure and less equity. Through the first quarter of this year, he saw an approximately 2 percent total return increase in investment-grade bonds, a 6 percent total return for the upper end of the speculative bond market, and a 12 percent total return for high-yield bonds.

Your financial adviser and 457 plan administrator should be able to help you with a target age that has a choice of equities and bonds in the right mix to meet your current risk needs. Just remember that as the markets turn around, you’ll want to return to your actual target age.

The same principles apply to your 529 plans, says Halsall. Under new IRS regulations, you’re allowed to make two transfers per year.

Keep annuity or go to a CD in my IRA?

Q: I have an IRA account with a securities company that is mostly comprised of an annuity issued by a separate insurance company. I have been told the IRA account is covered by SIPC (Securities Investor Protection Corp.) up to $500,000. I’m concerned about what would happen if the insurer went bankrupt. Would my account be covered or would I lose all the money? Should I opt out of the annuity contract, pay the surrender charges, and put the money in a safe investment, such as a CD?

J.G., via e-mail

A: The SIPC protects an investor in the event a brokerage firm fails, but Paul Markowich, a certified financial planner in Philadelphia, has this reminder: the SIPC does not provide protection against an insurance company becoming insolvent. For this reason, fixed annuities are not covered, though the present value of a variable annuity is covered (because its underlying asset is an investment such as a mutual fund).

Further annuity protection is provided by state government insurance funds, such as the Arizona Life & Disability Insurance Guaranty Fund.

Putting aside those protection limits, Markowich doesn’t recommend you surrender the annuity contract if there are no indications your insurer will have problems honoring its future contracts.

If your insurer became insolvent and no other insurance company were to purchase its business, and the government did not step in, you would lose any future guarantees associated with the annuity but your present account value is protected, says Markowich.

An option: Revisit the asset allocation within your annuity and rebalance your portfolio to your current risk tolerance. If you were a 50/50 (stock to bond) investor going into 2007, you’re probably a 35/65 investor now without making any changes. This is why rebalancing is important.

Got a question? Submit it to Steve Dinnen at money@csmonitor.com. Dinnen’s Financial Q&A column appears the first and third weeks of each month.