4 Ways to Avoid a Midlife Investing Crisis

In celebrity circles 40 is often viewed as the new 20, but that philosophy doesn’t necessarily apply where your investments are concerned. Taking big gambles with your portfolio in your 20s isn’t a strategy you can adopt as easily in your 40s or 50s when you have a shorter timeline until retirement.
As you move into your middle years, it’s important to make sure your investment approach isn’t straying too far off the mark. Here’s how to avoid falling victim to a midlife investing crisis.
Don’t toss the rulebook out of the window. One of the most common errors investors in their 40s and 50s can make is doing a poor job of managing risk, according to Chris Battreall, managing director at United Capital in Chicago.
“This most frequently takes the form of increasing their portfolio’s share of stocks when the market is high and overvalued, then selling after the downturn when most companies are on sale and cheap,” Battreall says.
Another mistake is chasing after the hot fad of the day, Battreall says. He points to tax credit investment programs, pricey variable annuities, hedge funds and specific stock purchase strategies like smart beta as examples.
“While it isn’t bulletproof, keeping to the basic fundamentals of a buy-and-hold portfolio over a long time period may be the most prudent decision,” Battreall says.
In addition to managing risk within their portfolios, middle-aged investors should also be keeping an eye on other potential threats to their retirement security.
“One blunder made by investors reaching their 40s and 50s is failing to look at risks beyond those presented by the capital markets,” says Kei Sasaki, regional chief investment officer for Wells Fargo Private Bank in New York.
The reality is that an individual’s risk extends well beyond simply market risk, Sasaki says. He advises middle-aged investors to also consider risk factors that are unique to their retirement plan, such as evolving liquidity needs, tax sensitivies, legacy planning and their overall investment time horizon.
Avoid being distracted by what other investors are doing. Investors must be careful to tune out the crowd when making investment decisions, says Oliver Lee, a financial planner and investment advisor at The Strategic Planning Group in Lake Orion, Michigan.
“A common investment mistake people tend to make once they hit their 40s and 50s is taking financial advice from office chatter and water cooler talk,” Lee says.
In some instances, investors may attempt to outthink the market, based on what they see others doing. While that may have worked in the past, it can backfire if you get the timing wrong. Lee recommends that investors in the middle stages of retirement planning stick to the facts when making investment choices.
“It’s important to know what [assets] you’re invested in and why you’re invested in them,” Lee says.
Paul Tarins, president of Soverign Retirement Solutions in Winter Park, Florida, says investors in their 40s and 50s should be wary of any investment that seems too good to be true.
“Chasing returns with speculative products can be a way to possibly do very well, but usually ends up doing more financial harm than good,” Tarins says.
Be careful about which basket you put your eggs in. Diversification is important at any age and maintaining the right mix of assets can be a balancing act in your middle years.
Todd Flynn, a certified financial planner and principal at Soundmark Wealth Management in Kirkland, Washington, says creating an intelligent allocation between stocks and bonds is essential for someone in their 40s or 50s.
“As they continue to save and invest in workplace retirement accounts, it’s important that they invest with an aggressive tilt to their portfolios while time is still on their side to maximize the return potential of equities compared to bonds,” Flynn says.
Flynn says that in periods of bear markets, middle-aged investors have more opportunity to take advantage of dollar cost averaging when making stock purchases. He does, however, caution investors to be mindful of inadvertently compromising returns in the decision-making process.
Robert Baltzell, president of RLB Financial in Los Angeles, says where you’re putting your retirement assets is another important element in achieving appropriate diversification.”People in their 40s and 50s tend to stick too much money in qualified accounts or tax-deferred accounts,” Baltzell says. “This might sound great at first but putting a majority of your money in one of these accounts is basically like a ticking time bomb. At some point, you’ll have to pay taxes and Uncle Sam is going to dictate when and how much you have to pay.”
Baltzell recommends that investors take advantage of their employer’s 401(k) to get a company match while putting at least 10 percent of their additional long-term savings into a Roth individual retirement account (IRA). Once you reach age 59.5, qualified withdrawals from a Roth account would be tax-free.
Remember that panicking isn’t the answer. If you’re in your 40s or 50s and retirement is getting closer, the last thing you can afford to do is let anxiety over running short on cash take center stage.
“Go back and visit your target,” Baltzell says. “Make sure it’s appropriate based on tax rates, realistic growth rates and the amount of money you’re putting away. If your target is realistic and you’re missing it, go back to the basics. Create a budget and look for ways to eliminate expenses as much as you can. If you don’t find a way, you’ll have to work longer.”
Sasaki reminds investors who may be worried about their retirement outlook to routinely assess their investments to make sure they’re aligned with their personal life goals and objectives. These can evolve over time, especially when life changing events like marriage and having children are thrown into the mix. In that respect, your investment portfolio should also have the ability to evolve.
One thing he strongly advises against: blindly taking on more risk in the hope of higher returns to make up for a shortfall. That can put you at risk for digging an even deeper hole.

Rebecca Lake

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