Warning to retirement savers: Don’t reduce stocks as you age

Many retirement investors intuitively believe that they should reduce their exposure to stocks as they age. After all, they have to protect their retirement nest eggs when retirement approaches and cannot afford to lose a big chunk of it in a market downturn, they believe.

Recent research by two professors at Lewis & Clark College in Oregon turns this standard investment model on its head. Harold J. Schleef and Robert M. Eisinger found that portfolios that gradually reduce stock allocations and increase fixed income assets have a lower chance of achieving a retirement goal than does a portfolio with a relatively high and fixed allocation to stocks. ” ‘Our results’ indicate that asset allocations should be weighted towards equities, even when few years remain in the non-retirement investment years,” they wrote. “This result contradicts the conventional wisdom inherent in most life-cycle allocations that call for shifts away from equities and toward less volatile investment instruments as an investor ages.”

Schleef and Eisinger set up various portfolios from conservative to aggressive, and compared static portfolios that maintained their original allocations to portfolios that gradually reduce stock exposure over a 30-year period. They found that investors who concentrated heavily in stocks and stuck with that allocation right into retirement had greater success than those who took less risk or who gradually reduced stockholdings. They simulated a range of market conditions by randomly generating thousands of 30-year return patterns using real returns for the years 1926 through 2006. The results “suggest that the presumed advantages of minimizing equity allocations over time is a dubious one,” they concluded.