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Make Less Money, Take More Risk?

The arguments for and against.

John Rekenthaler, 05/24/2016

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

In a recent video interview, Morningstar’s Laura Lutton--who also happens to be this columnist’s manager--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. (True, that was not Laura’s analogy.) Similarly, those with lower career earnings must dosomething 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 Americans to the sidelines, against their will, each year.

(Millions is no exaggeration. Each year, 4 million Americans retire. According to surveysfrom the Employee Benefit Research Institute, half these retirements are involuntary, occurring before the workers expect. For example, 45% of workers reported in 1991 that they planned to retire at age 65 or later. However, only 23% of current retirees--a group that includes many of those 1991 respondents--made it that far. A much larger number, 36%, retired before the age of 60.)

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 (I presume no relation) 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? I hope not. Because although higher risk may generate higher returns, there is greater chance that your investments will deliver less than the returns you expected.

is vice president of research for Morningstar.

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