Opinion – Grain in Grain: You shouldn’t change your portfolio just because you’ve retired

Common knowledge would say that when you retire, you should make your portfolio more conservative. This may be true for some conditions, but it cannot be generalized. In fact, if you have been disciplined in your financial life, your portfolio probably shouldn’t change with the date, but only with a strategy or by changing one of the factors that I will explain below.

Most people change their portfolio upon retirement for two reasons. Either they do not have enough resources to retire and, therefore, cannot take the risk with capital that was already in deficit, or they do not have an allocation strategy for the retirement period and end up going to the more conservative scenario.

Here I make a parenthesis to clarify the objective I have today. It is in a way an answer to Mr. Welson’s question. He wrote me, based on yesterday’s article:
“Okay. Your analysis is focused on the young productive market, that is, for the long term. But what about the financial market for the elderly?”

In fact, I didn’t specify the age of the reader, but yesterday’s article would serve both those who are starting to save and those who have already retired, that is, the “old age” in Mr. Welson’s definition.

The purpose of yesterday’s article was to explain how the reader might estimate the long-term return for each investment class. This estimate would not be different because of the age condition, but it is performed considering the long-term investment horizon, that is, more than 10 years.

If you are 79 years old, according to the IBGE, your life expectancy is 10.9 years. Therefore, the way of estimating the return explained yesterday could still be applied.

It is important to understand why, in this column, I do not usually suggest an allocation ratio on any asset. Suggesting a portfolio here would only make me sure of one thing. I would miss everyone. Allocation depends on a number of factors and is individual.

The purpose of this article is to explain what would justify a change in your portfolio allocation. Tomorrow, I’ll cover a strategy for how you can rebalance your portfolio in retirement considering individual risk conditions and market price movement.

Maybe you think: “ahh, today’s subject is tiring, I’ll wait for tomorrow’s one that is cool”. Don’t worry, you need to understand how to think about your basic allocation to move on to the rebalancing strategy.

Before that, it is very important to understand that you should never take more risk than necessary, not even at the beginning of your career, much less when you retire.

Your portfolio must have adequate risk. So, just because your status has changed to retired doesn’t mean you have to take less risk, and even less, it’s not because you’re young that you should take unnecessary risks.

So, to clarify when to change it is important to understand what should determine the allocation of your portfolio. For this, it is necessary to differentiate what is strategic allocation and tactical allocation.

The first defines the long-term weights of your portfolio in each of the investment classes. Tactical allocation, on the other hand, is the deviations made along the way due to changes in asset prices and the economic scenario.

Its strategic allocation must be related to three factors: return objective, risk profile and investment horizon.

Here’s the purpose of yesterday’s article. In order to find the strategic allocation that fits the return objective, it is necessary to have the long-term return of each investment class. In yesterday’s article, I provided the tooling for this.

Now back to today’s topic. Note that the fact of retiring does not necessarily change any of the 5 factors mentioned: economic scenario, market prices, return objective, risk profile and investment horizon.

You could argue that retirement would not change the last factor. In fact, changing your condition to retired changes your investment horizon in just one day, that is, it is irrelevant. As soon as you retire, you usually continue to have a long-term investment horizon, that is, more than 10 years.

In fact, the only factor that could justify an immediate change is the risk profile. The risk profile is composed of two sub-factors the ability to take risk and the ability to take risk.

Changing from being a saver to a consumer of the reserve in retirement may change your ability to take risk, but not your ability to take risk. You may be more sensitive to market volatility after you retire. Therefore, your ability to take risks may change.

However, the same should not happen with the ability to take risks. If you’ve planned well for retirement, the change in status is something to be expected. Soon, she was already considered in the ability to take risks. It’s different, for example, when something unexpected happens, like losing your job.

However, as the vast majority are not disciplined in saving for retirement, portfolio change ends up being a reality to protect themselves.

In fact, without planning, the portfolio you had before retiring was probably no longer adequate. So the allocation change is not due to the new condition, but perhaps because of finally doing some planning.

Tomorrow I will address a strategy for tactical allocation that is related to market price movement.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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