Relying on the Stock Market? Nothing Goes Up Forever

By Roger Wohlner

NEW YORK (AdviceIQ) -- Are you a retiree with most of your retirement investments in stocks? Good idea? No. Even as the markets near or notch records every day, you have to stay conscious of the risks of not diversifying between classes of assets.

A recent Wall Street Journal article discussed how retirement savers are putting more money into stocks. Two excerpts:

Stocks accounted for 67% of employees' new contributions into retirement portfolios in March, according to the most-recent data ... 

"What cash I have, I'm going to use to buy more if the market dips," said Roy Chastain, a 68-year-old retiree in Sacramento, Calif., who put an extra 10% of his retirement account into stocks in September, bringing his total stock allocation to 80%." 

If I understand Chastain's situation, he sold out about halfway through the market decline, likely missed a good part of the ensuing market run-up and now bulks up on stocks five-plus years into the market rally.

Also see: 2 Warning Signs for the Market

Part of the likely rationale: Stocks seem to be the only game in town. Bonds appear exhausted, with interest rates at record low levels that leave seemingly nowhere for bond prices to go but down. Alternatives beyond stocks, bonds and cash, the new darlings of the mutual fund industry, have merit but separating alternatives' wheat from the chaff is hard for most individual investors (and for many advisers).

With the stock market flirting with all-time highs and in year six of a torrid bull market, returns are even a bit more at risk than on March 9, 2009, when the Standard & Poor's 500 bottomed out. Let's say an investor's $500,000 portfolio has 80% in stocks and the rest in cash. If stocks drop 57% as the S&P 500 did from Oct. 9, 2007, through March 2009, the portfolio shrinks to $272,000.