“I’m taking an awful risk, Vader. This had better work.” – Grand Moff Tarkin

After the volatility of Liberation Day in early April, I heard two questions from clients.

“Is this a good time to rebalance to more stocks in my portfolio?”
“Do I need to take less risk?”

I’m going to focus on the latter question, however, before we can answer whether someone needs to take less risk, I think it first helps to answer, “What is risk?”

Risk is the possibility that an actual outcome will differ from your desired outcome. One of my favorite examples of risk in cinema occurs in Star Wars Episode IV: A New Hope. Grand Moff Tarkin and Darth Vader took the Death Star to the Yavin system with the desired outcome of destroying the Rebellion in a decisive battle. They had a decisive battle, but the actual outcome was the destruction of the Death Star and death of Tarkin.

When we think about investing, most people intend to rely on their investments for future income, so there are two primary risks an investor must contend with at different times in their life. Those phases of life are the asset accumulation and asset decumulation phases. This is called your working years and retirement in the common parlance.

During your working years, the primary risk is not saving enough in retirement assets to support the lifestyle you’ve grown accustomed to. For example, let’s say someone needs $5,000 a month before taxes from their retirement accounts. If we are using the 4% Rule and decide to withdraw $60,000 per year, by the time you retire, you might need $1.5 million in retirement assets to support those withdrawals for thirty years. Saving $900,000 by retirement, while very commendable, will not cut it.

When it comes to personal finance, the best way to mitigate risk is by being proactive. Below are a few ways to reduce risk during your working years:

Start Date: The younger you start saving and investing, the more time you have for compound interest to work its magic. Furthermore, the later you start investing the higher your contribution rate needs to be to attain the same account balance goal. If you need $1 million at age 65 and start contributing to your retirement account at age 25, you only need to contribute $5,000 per year assuming you average a 7% return during those forty years. If you start contributing at age 45, you need to contribute $24,348 per year.

Portfolio Allocation: Throughout our working years we will have an evolving mix of stocks and bonds in our portfolio, ranging from 100% stocks when we are twenty-five to 60% stocks and 40% bonds when we near retirement at sixty-five. This transition reflects a tradeoff in risk. When we are young, we take on more risk in stocks because over long periods of time they have tended to achieve a higher rate of return over other asset classes. The inherent risk in owning stocks is reduced by eliminating unsystematic risk, risks to a specific company or industry, by having a diversified portfolio. This leaves us with systematic risk or non-diversifiable risk. Bonds are added the closer we get to retirement to reduce volatility and preserve capital because we are nearing the time when the risk transitions from not having enough assets by retirement age to retirement assets not preserving value when you need to convert them into income.

As I alluded to earlier, the primary risk during retirement is a little different. In retirement we are converting assets we have built up over many years into monthly income. So, when a retiree asks, “Do I need to take less risk?” they are really asking if the volatility in stocks is a threat to their cash flow. Fortunately, that risk can be reduced through proper portfolio allocation.

Bonds: By now, almost everyone knows you shouldn’t sell out of a diversified portfolio of stocks when markets experience a downturn. Because of this, I suspect some retirees think when assets in their account are being sold to generate income, those assets are stocks, and therefore stocks are being sold at a loss. Or perhaps a pro-rata share of stocks and bonds are being sold. That’s usually not the case. Instead, a financial advisor is generally going to recommend having five to ten years’ worth of retirement cash flow needs in investment grade bonds. This means if you need $40,000 in withdrawals each year and have a portfolio of $1 million, $400,000 might be allocated to bonds. Why? Because bonds are not going to change in value much during a market downturn. A bond holder is entitled to their interest payments and principal, despite what’s happening in the stock market. Which is why bonds, in the form of a mutual or exchange traded fund, are the asset periodically liquidated to supply your monthly income. A financial advisor is not going to sell out of the stock side of your portfolio during a market downturn to fund your income needs.
Stocks: We have already covered how a retiree doesn’t need to worry about short-term volatility if five to ten years of their monthly spending needs are met by the bond allocation of their portfolio. Historically, this has been more than enough time to recover from a market downturn. However, we can further reduce volatility by being globally diversified. The US and International markets don’t always move together or move at the same magnitude. For example, the U.S. market was down -4.8% for the first quarter of 2025 while International Developed markets were +5.8%.

As in many fields, when it comes to investing, it is important to determine the actual risk and potential outcomes in any endeavor. Attempting to take “less risk” by getting out of the market or reducing exposure can be far more detrimental to your long-term goals.