Portfolio Dilemma: I’m 65, how much should I hold in equities?

Blake asks:Most of my portfolio is in shares and that has paid off handsomely over time, leaving me with a big pot for retirement. But as I approach the age of 65 and step back from full-time work, I’m aware of the need to de-risk. How much should I have in equities? 

Investing for growth can be a multi-decade affair – but it’s also the “easy” part of your journey.  

You put money aside to invest, try to diversify, and ideally embrace the risk of having everything in equities or other so-called risk assets. 

Over time that allows you to compound returns and build up a healthy retirement pot. 

This approach has certainly worked for Blake, but he now needs to think about pivoting. 

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His portfolio will likely need to provide him with an income, for one.  

But just as importantly he now needs to defend what he has built up from stock market volatility – while not completely giving up on the prospect of portfolio growth. 

It’s therefore good to ask how much you should now have in shares, although the answer will be very specific to each individual. Having said that, a few guiding principles might prove helpful here. 

A useful yardstick 

Common rules of thumb are useful when it comes to such questions – although your own attitude and preferences will ultimately play a bigger role in what you do. 

One commonly cited approach is the “rule of 100”. Here, you subtract your age from the number 100, with the answer representing what proportion of your portfolio should sit in equities. A 65-year-old might therefore have 35% in equities. 

On the fund front, there are many multi-asset funds that operate within these boundaries. The Investment Association (IA) has one sector, Mixed Investment 0-35% Shares, where that 35% level would be the upper limit. 

Meanwhile, the widely followed wealth preservation investments trusts go in some cases even lower on equity exposure, as the table shows. However, that might reflect their fairly bearish views on markets. 

Source: End of August factsheets.

Not just the numbers 

As ever, yardsticks like this are only really indicative. Investors like Blake may well be happy to tolerate a greater level of risk and be keen to participate in future gains from the stock market. 

With that in mind, it’s worth asking a few questions to determine your best approach: 

• How much of a portfolio fall can I tolerate emotionally?
• How much can I actually afford to lose (be that temporarily or permanently)?
• How much portfolio growth do I need (for my own needs, or for example to pass on to family when the time comes)?
• How much do I want to keep investing, as a passion? 

These might do better to clarify your position than the rule of 100. A risk-averse investor, or one who simply cannot afford to see much of a dent in their portfolio, would do well to pare back equity exposure quite significantly. 

Those with more leeway, or a greater interest in growth investing, might keep more skin in the game on this front.  

And there might be compromises here – someone who loves picking stocks could well invest most of their portfolio cautiously but have a small, separate portfolio that they invest for fun, for example. 

Other routes 

There are also other approaches available. An investor could, for example, keep a substantial cash pile on the side (to cover, say, a year of outgoings) and then run a higher level of risk in their portfolio.  

That gives them some time to ride out the more challenging market conditions – although a cash pile may not be enough if we enter a bear market that lasts several years. 

It’s also worth thinking hard not just about how much you have in equities, but what equities you have.  

Diversification is key in a market that seems to largely be driven by the artificial intelligence (AI) theme for now, meaning investors should have exposure to all the main equity regions, as well as different sectors and investment styles. 

That could be achieved by, for example, holding funds with different styles in the same region.

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Defensive equity investing has plenty of appeal here and there is something to be said for income funds, which might lag the competition in big market rallies but suffer less in a sell-off. 

Such funds do need carefully inspecting but some more defensive examples might include the likes of Artemis Income I Inc (B2PLJJ3) in the UK, JPM US Equity Income B Net Inc (B3FJQ37) (which has admittedly lagged the market often in recent years), and arguably Henderson Far East Income Ord (LSE:HFEL) in Asia. 

Across regions, certain franchises, from the various equity income funds managed by Guinness to the SPDR “dividend aristocrat” exchange-traded funds (ETFs), try to access dividend-paying companies with an eye on avoiding painful losses. 

But again these funds can trail behind the competition when markets are doing well. 

What else do I even hold? 

Your equity exposure is just one side of the equation, and as we have discussed before it’s not easy to find good defensive assets. They might work, or not, depending on the specific traits of any given equity market sell-off. 

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It therefore makes sense to hold a broad mixture of defensive assets, from bonds to physical assets and perhaps some esoteric holdings, such as absolute return funds and hedge funds. 

There’s also the simple appeal of having cash in your portfolio – although over time this will exert a drag on your returns, especially in times of high inflation. 

If you have a question you’d like to be considered in our Portfolio Dilemma series, we’d love to hear from you. Please contact: editorial@ii.co.uk