Is your retirement account portfolio more concentrated than you think?

Retirement planning can be complicated, especially when investors do not realize how much risk they may be carrying in their portfolios.

For Matt Dages, founder and CEO of Bright Wealth Management, one of the first steps in retirement planning is helping clients understand exactly what they own and why they own it.

That can be particularly important as technology stocks have become a major part of many broad market indexes.

“Many people, they own broad market index funds, and they don’t realize exactly how much exposure they have to just a handful of companies,” Dages said on the Bright Wealth Management Show.

Investors do not necessarily have to buy individual technology stocks to have significant exposure to the sector.

Dages said retirement accounts invested in target-date funds, growth funds or S&P 500 index funds can gradually become more concentrated in the same companies as those stocks grow to represent a larger share of the market.

“Investors didn’t necessarily choose to become super concentrated or overweight in technology,” Dages said.

But that can create a potential problem for retirees and those approaching retirement who may have a different risk tolerance than they did earlier in their careers.

Dages recalled meeting with a prospective client who believed she was a conservative investor. She had worked for the same company for 25 years and had never changed the allocation in her 401(k).

“Even though she is now 60, she is still investing the same way as when she was 35 or 40 years old,” Dages said.

The analysis showed that several of her funds were invested in many of the same companies.

For Dages, the lesson is not that investors should avoid technology or other successful sectors.

“The lesson isn’t to avoid some of these companies. It’s not to avoid innovation. It’s not to avoid tech,” Dages said. “It’s just to avoid becoming too dependent on any one theme or any one investment.”

A portfolio can change without you changing it

Market cycles can cause the makeup of an investment portfolio to shift over time.

A stock that starts as a relatively small portion of a portfolio can become much larger if its value rises significantly. That can leave investors with more concentration risk than they originally intended.

Bright Wealth Management focuses on reviewing those allocations and rebalancing when necessary.

“We don’t simply sell because something has gone up,” Dages said. “We want to look at and evaluate whether the position still fits your overall retirement objectives and risk profile.”

He said the same principle can apply to investors who primarily use index funds.

“If you’re an index fund investor over time, that occurs without that kind of regular maintenance on the portfolio,” Dages said.

The goal is not day trading but strategic portfolio management designed to keep a retirement strategy aligned with an individual’s goals and risk tolerance.

Retirement planning goes beyond the number on a screen

For people approaching retirement, watching a 401(k) or IRA balance rise and fall can provide a snapshot of where they stand.

But Dages said the balance itself is not a retirement plan.

“If you have those investments, if you’re looking at those numbers on a screen and you’re associating your retirement with a number, that is not a retirement plan,” Dages said.

A comprehensive retirement plan can address how much someone can spend, how withdrawals will be handled, potential tax liability, Medicare considerations, Social Security and estate planning.

Dages said that approach can also provide reassurance to people who underestimate how well they have prepared.

“I can tell you so many people really truly don’t know how well they’ve done or what they’ve saved,” Dages said.

He said clients sometimes arrive worried that they have not saved enough because of figures they see online about how much money they supposedly need to retire.

But a person’s retirement picture can include more than an investment account.

Someone may have Social Security, a pension, savings, real estate or other assets that need to be considered together.

“When we sit down with them and we can show them all the tools that we have and I can give them that visual and I can show them how we can coordinate it, the stress comes off of them before they leave the office,” Dages said.

Anyone who wants to hear what the Bright Wealth Management team can do for them can claim a complimentary written financial plan online or by calling 480-866-0044.

The Bright Wealth Management Show with Matt Dages airs Saturdays from 1 p.m. to 2 p.m. and Sundays from 3 p.m. to 4 p.m. on KTAR News 92.3 FM. 

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