Before Wichita Investors Who Are Near Retirement Pick Another Investment, Make Sure To Get the Stock and Bond Mix Right!

I meet plenty of people who can name an investment they like.

Maybe it’s a mutual fund a coworker recommended. Maybe it’s a stock that’s been sitting in an old account forever. Maybe it showed up on a “best funds” or “top investments” list somewhere.

But ask why they own it, and the answer often sounds like they barely remember the reason.

Then ask a more difficult question, and a better one: how much of your total portfolio is in stocks, bonds, and cash?

That answer matters more.

Investment selection matters. Costs matter. Taxes matter. But the basic allocation across stocks, bonds, cash, and other assets controls the fundamental job your portfolio is trying to do. Growth, stability, income, liquidity. All of that starts with allocation.

Allocation comes first

A 62-year-old in Wichita with $1.5M, a pension, and 3 years until retirement has a different problem than a 42-year-old still saving aggressively.

They might both own the same fund. That doesn’t mean they have the same plan.

One portfolio might need to grow for 25 more years. Another might need to fund withdrawals next year. One investor may sleep fine through a 30% market drop. Another may see the same drop and start wondering if Walmart is hiring.

Same market. Same fund. Completely different situation.

That is why allocation comes first.

Benjamin Graham wrote about this decades ago in The Intelligent Investor. For the defensive investor, he suggested a basic split between high-grade bonds and common stocks, often using 50% stocks and 50% bonds as a starting point. He also allowed a range between 25% and 75% in either direction.

The exact number wasn’t magic. And I’m certainly not suggesting you copy those allocations.

The discipline was the point.

Decide how much risk belongs in the portfolio before you start picking individual investments.

The famous 94% stat needs a warning label

You may have heard some version of this claim: asset allocation explains more than 90% of investment returns.

That line gets repeated a lot. It also gets abused.

The original research from Brinson, Hood, and Beebower looked at pension plans and found that policy allocation explained 93.6% of the variation in quarterly returns over time.

Later, Roger Ibbotson and Paul Kaplan clarified the issue in the Financial Analysts Journal. They found that asset allocation policy explained about 90% of a typical pension fund’s return variability over time, about 40% of the return differences between pension funds, and roughly 100% of the average return level.

Translation: allocation matters a lot. But don’t turn the statistic into a bumper sticker.

A good fund still matters. Costs still matter. Taxes still matter. Disciplined behavior still matters.

But if the overall mix is wrong, the investment is being asked to save a plan it didn’t build.

Too safe can be risky

This is where people near retirement can get themselves in trouble.

They see retirement getting close. They remember 2008. They remember Covid. They remember the ugly market in 2022. So they decide they want to be “safe.”

That may be reasonable. Or it may quietly starve the plan.

Over long periods, stocks have usually paid investors more than bonds because stocks come with more pain. Vanguard’s global return data from 1901 through 2022 showed higher average annual returns as stock exposure increased. It also showed wider bad-year outcomes as stock exposure increased.

That is the trade.

If you own too little stock, inflation and withdrawals can grind down the plan slowly. It may feel safe at first because the account doesn’t bounce around as much. But the danger is still there. It just wears different clothes.

Too aggressive can be just as dumb

The other mistake is owning too much stock because the spreadsheet says it works.

But a spreadsheet doesn’t wake up at 2:00 a.m. after the market drops 30%.

You do.

An aggressive allocation can make sense for some investors. It can also become a loaded gun for someone who thinks they are risk tolerant because they have only lived through bull markets.

The real test is ugly markets.

How much can your portfolio drop before you start changing the plan? How much can your spouse watch it drop before they lose confidence? How much of your next 5 years of spending is exposed to stock market timing?

That is the part investment lists don’t answer.

The $400 chef’s knife problem

Buying funds before deciding allocation is the $400 chef’s knife problem.

You can own a beautiful knife and still have no idea what you’re cooking.

The knife may be excellent. The reviews may be perfect. The steel may be incredible. But if you haven’t decided whether you are making dinner for 2 people or catering a wedding, the knife is a detail pretending to be a plan.

Funds are tools.

Allocation decides the job.

Ask better questions first

Before you ask which fund to buy, ask these first:

What does this money need to do?

How much of it needs to be available in the next 5 years?

How much needs to grow for 15 to 30 years?

How much market loss can I watch without doing something dumb?

What income sources already stabilize the plan, such as Social Security, a pension, or rental income?

What would my spouse need if I died first?

Once those answers are clear, fund selection gets easier.

You still have work to do. You still need diversified investments, reasonable costs, tax awareness, and a rebalancing plan. But those decisions sit underneath the larger allocation decision.

They are second-level decisions.

A good fund can’t fix a bad plan

A bad allocation puts you in an impossible spot.

Too cautious, and the plan may slowly suffocate. Too aggressive, and one ugly bear market can scare you into selling at the worst time.

Both mistakes are preventable, but only if you choose the allocation on purpose.

So before you chase the next investment your coworker loves, ask the cleaner question:

Does my portfolio match the life I’m asking it to fund, or am I hoping a good investment bails out a plan I never actually built?

Schedule A Meeting With Jonathan

Sources:

[1] Roger G. Ibbotson and Paul D. Kaplan, “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?”, Financial Analysts Journal, 2000.

[2] Vanguard, “Principles for Investing Success.”

[3] Benjamin Graham, The Intelligent Investor, Chapter 4, “General Portfolio Policy: The Defensive Investor.”

*Disclaimer: This article is for educational purposes. It is not personalized advice, a recommendation, or an offer. Decisions about asset allocation, fund selection, taxes, and withdrawals depend on your full plan, risk tolerance, time horizon, and current law. Talk with a CFP or CPA before acting.