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In the beginning of my financial journey, I envisioned retiring around the age of 53.
The reason for this odd mile marker choice was that this would be my age when my daughter went off to college.
I figured if I retired earlier I would still be bound to my daughter’s school schedule.
If I couldn’t truly live my envisioned “retiree life” because of her schooling, I might as well be working.
Now that I have turned 48, I have entered that dreaded “5 year window” every pre-retiree eventually faces.
It is this window that the dreaded SORR (sequence of risk return) can wreak the most havoc on a portfolio and when your nest egg is at its most fragile state.
David Graham, of FI Physician does a wonderful series of articles addressing this dangerous period, highlighted by the helpful post, “De-risking Your Portfolio Prior To Retirement: Why And How.”
I also recently came across a video, “The Coming Retirement Crisis,” which also put me a bit on edge and was the inspiration for a previous post I wrote.
Everything I have read backed up the premise that as you approach retirement you should become more conservative in your asset allocation.
It truly is a premise I believe in.
So what is the big issue, you may ask?
Well knowing what you should do and doing it are two completely different things.
The asset allocation that I created for myself had done very well (boosted with a very kind and long bull run we have enjoyed for a decade).
It truly felt like I had a winning hand year after year.
The problem is there was a voice in the back of my head that kept urging me to hold onto this hand.
And therein lies the problem with classic financial behavioral psychology at play.
An asset becomes overweighted in your portfolio when it outperforms other classes that lag behind due to underperformance.
When you rebalance you are therefore selling the “winners” to buy the “losers (or alternatively you throw in new capital towards the losers.)
That is indeed a hard pill to swallow.
Every fabric of your being questions this move.
A part of you feels like you have caught lightening in a bottle so why on Earth would you open the cap and let it escape?
Are you doing the right thing?
And these emotions arise just when talking about the simple act of rebalancing a portfolio to your current desired asset allocation.
The feelings of doubt get magnified even more when you are talking about doing a major change to your portfolio that comes with transitioning to a more conservative allocation, as was in my case.
Not only was I faced with selling down my high performing equities component, but I was talking about permanently taking some chips off the table by reducing the overall percentage of equities in my Market portfolio.
It is hard to take equities off your plate when they have been doing so well both recently and throughout the history of the stock market.
Equities can be considered the engine driving the majority of gains enjoyed by a portfolio.
However riding that engine too hard and too long can cause it to overheat and blow up.Equities can be considered the engine driving the majority of gains enjoyed by a portfolio. However riding that engine too hard and too long can cause it to overheat and blow up. Click To Tweet
The last thing an individual wants is for that event to happen right before your planned retirement date.
Equities are far more volatile than most other asset classes.
Yes the overall trend for equities is upwards, but most about-to-retire individuals do not have the luxury to wait for a recovery.
So what did you end up doing Xrayvsn?
I wish I could say that it was an easy, slam-dunk decision that never made me second-guess it in the following weeks.
As I said, even knowing that it was the right thing to do did not make the decision easier.
It was sort of like having the devil on one shoulder and an angel on the other, both pleading their cases:
Let’s let it ride for just a little longer.
How do you think you will feel if the market continues to go up and you already cashed out?
Won’t you feel like a fool?
You have been lucky for a long time, how much longer do you think this can last?
There are countless stories of unfortunate individuals who were just about to retire when the market fell and they had to delay their retirement, often by many years, because of it.
Don’t add your name to that list.
I even tried rationalizing a decision to maintain my current asset allocation because of the passive income machine I have generated from my real estate portfolio.
I thought that, worst case scenario, I still would have an income floor to rely on because of this passive income, trying to justify maintaining a higher than recommended equity allocation.
In the end, logic won out.
I could not argue against material presented by far smarter people than I about the value of de-risking one’s portfolio in the period right before planned retirement.
Once I came to this decision, albeit kicking and screaming along the way, it was just a matter of a few button clicks and voila, it was done.
Although, because of my reduced exposure to equities, I will not capture all of the highs that may occur as stocks continue to climb, I will have also blunted the lows should a recession indeed occur during my period of most vulnerability for SORR.
If you are in search of financial help, please consider enlisting the service of any of the sponsors of this blog who I feel are part of the “good guys and gals of finance.”
Even a steadfast DIY’er can sometimes gain benefit from the occasional professional input.
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