The most frightening billboard I saw in recent months ran along the Westside Highway in Manhattan. From the good folks at Prudential, it read: The First Person To Live To 150 Is Alive Today, with the subhead, Plan For A Longer Retirement. A few weeks later, our sister publication, Time Magazine, followed in tandem, asking the question on its cover: Can Google Solve Death?
We get it. From a financial (as well as, of course, a medical) perspective, longevity is very likely the issue of the century. What can you do about that? Saving more never hurts, the folks behind America Saves Week, which happens to be now, nudge us to remember on an annual basis. (If you need help saving more, check out the resources here.)
But, the longer your time horizon, the more you may also want to think about socking away in stocks. A new paper from Morningstar Head of Retirement Research David Blanchett along with Michael Finke of Texas Tech University and Wade Pfau of The American College looks at the issue of time diversification, defined as “the anomaly where equities become less risky longer investment periods.” The researchers look at 113 years of data from 20 countries and found that, yes, the longer your time horizon, the more you may want to allocate your investments to equities.
How much more? A moderate investor, who might want 45% of his portfolio in stocks with a one-year time horizon, could increase that allocation to above 80% if he had 20 years to go. An aggressive investor could go from 70% to almost all in. Looking backward, Blanchett explains, that by doing so investors could have increased their returns without upping the risk they were taking on. The obvious next question, he acknowledges, is will this continue in the future? No one knows, of course. “But looking at different time periods, we can see that this benefit has been increasing – not decreasing – over time.” That said, investing based on this research means doing a couple of things.
• Stay diversified. Time diversification, both Blanchett and his co-author Finke note, does not erase the need for diversification overall. You still have to make sure you’ve got your small-and-large cap, your domestic-and-international, and other equity bases covered. Beyond that, though, taking this advice means arming yourself to fight human nature. “People pull money out of equities and put money into equities based on their emotions,” Finke says. “To do this, you have to focus less on how comfortable you are with [stocks] and more on your time horizon.”
• Know yourself. You also have to know if you’re an ostrich (or an anti-ostrich.) A 2013 working paper called Financial Attention noted that that people both seek out and avoid all kinds of information for “decision making purposes and psychological reasons.” Ostriches look at their portfolios less when the market is down than when it is up – and are less likely to trade in down markets. For the long-term investor, that’s a good thing. Anti-ostriches do the opposite – they seek out bad news and react. The question is: Which are you? According to the research, men, older investors and wealthier investors are more likely to be ostriches. Women, younger investors and less wealthy investors, anti-ostriches. If you’re among the anti-ostrich crowd, it becomes more important to figure out a way to resist your natural impulses. Turn off the TV. Don’t log into your accounts. If you’re working with a financial advisor, ask for help sticking to your plan.
• Later in life, pay particular attention. One of the more worrisome things that happened during the great recession, Finke notes, was that many older households pulled money out of stocks and put it into cash. He attributes that to moderate to severe cognitive decline, which according to the report Growing Older In America from the University of Michigan, affects 10% of people at age 70 and increases “sharply” with age. This argues, Finke says, for “annuitizing, investing in a fund that automatically kicks out income and rebalances for you or finding a trusted advisor.” If you’re not in that age group yet, but have parents that are, it presents a compelling reason to make sure they too are sticking to their plan.
More from Jean Chatzky:
• How millennials can improve their credit scores
• How to navigate the murky world of credit card scores
• Finally, a retirement plan friendly to small savers?
