Stocks Special Reports LICs Credit Technical Analysis Funds ETFs Tools SMSFs
Learn
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features Technical Analysis SMSFs Learn
About

News

Make less money, take more risk?

John Rekenthaler  |  31 May 2016Text size  Decrease  Increase  |  

Page 1 of 3

John Rekenthaler is Morningstar's US-based vice president of research.

 

There are two schools of thought on whether those who make less money should assume more risk in their portfolios.

In a recent interview, Morningstar's Laura Lutton argues for the affirmative. If you're shorter, slower, and can't jump as high as your opponent, you won't get many rebounds unless you outwork her.

Similarly, those with lower career earnings must do something better than their wealthier peers, if they attain equality in retirement--for example, holding a higher stock weighting.

Of course, there are many somethings available to retirement plans besides assuming greater investment risk. Better somethings, too: saving more, retiring later, and cutting portfolio costs are superior options to boosting one's stock percentage.

The first two actions guarantee higher retirement income, no matter how the markets perform. The third is not as ironclad, as pricey investments sometimes beat their cheaper rivals, but it is safe. Whereas owning additional stocks is not.

Unfortunately, those better somethings can be unrealistic. Investing more to catch up sounds fine in principle, but in practice it means expecting the lowest-paid workers to have the highest savings rates. Good luck with that.

Retiring later is a likelier hope, but no more than that. Health concerns, family issues, and/or corporate downsizings send millions of workers to the sidelines, against their will, each year.

So, yes, along with using the painless lever of lowering costs, lower earners might also wish to increase portfolio risk.

That action comes neither without pain nor without real danger--the possibility that poor stock market performance will leave the retiree with significantly fewer assets, and thus less income, than if she had played it safer.

However, the alternatives of saving more when more cannot be saved, retiring later when later will not be permitted, and of investing conservatively, thereby forgoing all hopes of ever catching up, are imperfect as well.

Forbes contributor Frances Coppola disagrees. In "No, Living Longer and Earning Less Are Not Good Reasons to Take More Risk," Coppola writes:

"Consider the case of a 40-year-old single man on the median wage. Would any decent investment adviser tell him to take higher risks in his portfolio than a single man of the same age on a six-digit salary?"