The story is told of a king who sought a wise and trustworthy driver for his daughter’s carriage. To gauge each applicant’s suitability, the king posed a question: “Between the castle and a nearby village, the road passes along a cliff. How close could you get the carriage to the edge without going over?”

The applicants boasted of their skill, each bragging that he could bring the carriage’s wheels within a foot, perhaps even inches, of the edge. Except for one man. “My king,” he said solemnly, “With your daughter in my charge, I would keep the carriage as far from the cliff’s edge as possible.” The king selected him immediately.

Arriving safely

In investing, as in life, you can’t avoid all risk. But — as the prudent carriage driver understood — it’s not wise to take unnecessary risks. Arriving at one’s destination safe-and-sound is the most important thing.

The wisdom of “staying away from the edge” is something you should consider carefully in your 50s and 60s as your retirement years begin to come into focus. Greater financial risk-taking, which may be quite appropriate when younger, should give way to a less-aggressive approach — especially if dialing down your risk retains a strong likelihood of getting you to where you want to go.

Let’s add some context. Investors who’ve stayed the course over the past dozen years have had the wind at their back. Consider that from the bear-market bottom on March 9, 2009, through March 8, 2021, the U.S. stock market (as measured by the Wilshire 5000 Total Return Index) rose by roughly 600%. In dollar terms, a $100,000 investment in March 2009 would have grown to about $700,000 by March of this year!

Everyone’s financial situation differs, but we suspect that such impressive performance has put many 50-something and 60-something investors in a position to lessen their investment risk from this point and still reach their financial goals.

Remember, SMI consistently teaches that the goal of investing isn’t to build the biggest possible nest egg. Instead, we believe your objective should be to build a portfolio that is sufficient — i.e., one ample enough to fund your retirement years and meet other financial goals you may have, such as those related to giving and perhaps helping to provide a Christian education for your grandchildren.

A screen capture from MoneyGuide's "What If Worksheet." ("Adjusted Real Return" accounts for the impact of projected inflation.)


Making use of MoneyGuide

Before you can determine whether you can take less risk and still meet your goals, you must be sure your goals are clear and measurable. For help with that task, we recommend using MoneyGuide, the web-based financial-planning software available to SMI Premium-level members.

MoneyGuide’s “About You” section poses a series of questions to help you clarify/refine your financial goals in the areas of lifestyle, leisure, health, generosity, and so on. You’ll also answer questions that help define your risk tolerance.

Once you have entered information about yourself — and details related to current holdings, other savings, and projected Social Security benefits — MoneyGuide can gauge how well-positioned you are to meet the goals you’ve established. In the “Results” section, the software will “Run 1,000 Trials” that project the impact of various financial scenarios, including unpleasant ones such as an uptick in inflation or a market downturn occurring as you reach retirement.

Ideally, MoneyGuide will determine that you have a high “Probability of Success” in regard to meeting the goals you’ve defined. (If your “Probability of Success” is below the “Confidence Zone,” you can adjust your goals using the “Choices” or “SuperSolve®” options in the “Recommended Scenario” area.)

If the “1,000 Trials” exercise reveals that you’re well on track toward meeting your goals, congratulations! Next, you can use MoneyGuide’s “What If Worksheet” (found under the “Create a Recommended Scenario” tab) to gauge the projected impact of reducing your investment risk. The worksheet allows you to lower your returns projections — a proxy for reducing risk — and see the impact this has on meeting your goals.

To experiment, create a “What If Scenario” by using use the drop-down menu at the top of the page. Then click the word “Go.” Next, scroll down to the area labeled “Hypothetical Average Rate of Return.” Select a return option (perhaps “Conservative” or “Moderate”) that has a “Composite Return” that’s lower than the return shown for your “Current Scenario.”

For SMI members, MoneyGuide’s default options range from 4.9% for the “Conservative” posture to 8.9%  for “Aggressive.” (To view the specific SMI-based portfolios on which these returns are based, look in MoneyGuide’s “Risk and Allocation” section under “About You.” Scroll to “Model Portfolio Table.”)

You also can select SMI’s 50/40/10 approach, which falls between “Moderate” and “Aggressive.”

Or you can ignore the default options if you prefer and input any specific rate-of-return you choose. Simply select “Entered Return” from the drop-down menu.

When ready, click “Calculate All Scenarios.” The “What If Worksheet” will display how a change in projected returns is likely to affect the “Probability of Success” of funding your financial goals.

If using an “Entered Return” (i.e., a specific rate of return you choose), we suggest you don’t make your return projection too rosy. Given current valuation levels, market returns for the years ahead aren’t likely to be as robust as returns for the dozen years just passed. So it’s wise to experiment with a range of returns that might be considered below average.

Thinking things through

The point of this exercise is two-fold. First, given the strong overall returns of the past 12 years, we want you to know if you’re closer to reaching your goals than you realize. Secondly, if retirement is only a few years away, we want you to consider if adopting a less-aggressive posture from here on can still offer a likelihood of providing what you need.

After all, there is no great virtue in steering close to the edge. The important thing is to arrive safely.

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