Bracing Investments for Financial Blows

Many uncertainties in life can positively or negatively impact your wallet. You could get fired or hired, you could receive a nice bonus or be made obsolete by technology, and the market could boom or bust. A recent report by the investment research company Morningstar Inc. suggested that portfolios with lower equity exposure and higher saving rates can make investors more financially resilient.

When financial planners work on comprehensive investment strategies known as “life cycle models,” they generally assume that investors’ income will remain stable or gradually grow. Morningstar researcher Sebastian Gomez-Cardona wrote in a summary of his report that investors need to better account for positive and negative risks—events outside their control—and adjust their investment strategies based on their age and wealth.

Investors in their 20s generally have limited ability to bounce back from financial losses, so Gomez-Cardona advised them to reduce the share of equity and increase the share of bonds in their portfolios.

Typically, investors in their 30s have built a financial cushion, so they can increase their equity allocation in order to accumulate more wealth over time, according to Gomez-Cardona.

As workers approach retirement age, their financial resilience once again decreases. Gomez-Cardona advised that investors in their 50s who are exposed to high income volatility should reduce their equity allocation by 2% to 7%.

Likewise, because investors in their 30s tend to increase their earnings, they are encouraged to save more. Gomez-Cardona said investors who accumulate at least 15% more financial wealth in their lifetime tend to have higher saving rates by at least 3%.

Investors should also take their field of work into account when considering portfolio strategies. Financial sector employees usually have higher income volatility and earnings tied to stock market performance, so Gomez-Cardona advised them to have a more conservative equity allocation. Public service employees in sectors like education, health services and utilities usually do not have incomes tied to stock market performance and can afford a riskier portfolio allocation. 

Portfolios that adjust for risks can make noticeable gains compared with those that do not, according to Gomez-Cardona. He found that investors in their 30s who factored risks into their portfolios had 39% more assets than those who did not, and investors in their 40s who factored in risks had 28% more assets than those who did not.

Morningstar’s report used data from the University of Michigan Institute for Social Research’s Panel Study of Income Dynamics.