As you near your investment goal -- retirement, college, a house down payment -- it's time to shift to more conservative investments, conventional wisdom says.
But as the world changes, conventional wisdom changes, too.
Advisers still say it's important to reduce risk and preserve capital, but a portfolio that's too conservative can be as bad as one that's too risky -- especially when nearing retirement.
"It's not as simple as it used to be," said Sarah R. Sullivan, a financial adviser in the North Baltimore office of Morgan Stanley Dean Witter. "You have to weigh priorities. You'd probably keep more money in quality stocks than you would 10 years ago."
"Some people have misconceptions about how secure their income needs to be," said Neil Adelberg, vice president of Peremel & Co. Inc., a Pikesville stock brokerage, and a registered investment adviser. "No risk is irrational, also."
"The old model is that you would cash out and live on the interest. But now you might retire at 62 and live to be 90 or 95. You've got to get over riskaphobia, or inflation will be eating at your principal," warned Tod Barnhart, an investment adviser in Idaho. He is the author of the "Five Rituals of Wealth" and "A Kick in the Assets."
Barnhart recommends that retirees keep about 20 percent of their assets in bonds, about 10 percent in cash, and the rest in stocks.
Others declined to recommend percentages.
"There's a rule in the business -- have your age in fixed income. But I don't do that," Sullivan said.
The first step in deciding how to manage a portfolio when closing in on the goal is to make sure the goal is clear in the first place, said Brian MacLean, a certified financial planner with I.F.S. Investors Services Inc. in Bowie.
"What we combat every day is: You need to remember what your goals were," he says. "When people are doing well in the market, it's hard to remember your target. If you're shooting for 30 percent, your money is at much greater risk than if you're shooting for 8 percent."
The amount of time until retirement or college is also a factor. Sullivan, for example, believes that if the goal is five years away, stocks are best.
But while warning against being too conservative, the advisers all suggest lower-risk investments when the goal is near.
"When you reach your goal, you have to try to preserve what you have, and move down the risk ladder," said MacLean.
Adelberg, for example, suggests utility stocks, mutual funds that provide a mixture of growth and income, preferred stock and blue-chip stocks -- all with some potential for growth, but with relatively low volatility.
Sullivan says she sometimes follows a "principal guarantee strategy" for clients. Say a client has saved $50,000, and needs that amount in a few years for a specific goal. She could buy a government bond worth $50,000 in maturity. For a bond maturing in 2005, the current cost would be $36,750 -- leaving $13,250, which Sullivan would put into aggressive growth stocks.
Brett Carter, president of First Mariner Mortgage, counsels that reviewing investments isn't enough.
"Everyone looks at assets -- stocks, 401(k) -- but nobody looks at how their debt is structured," he said. Mortgages allow people to get money at lower costs than credit cards and other types of loans, so paying off a mortgage early is generally a bad idea, he advises.
"Keeping money in your house," Carter warned, "is like putting the money in a Maxwell House can and burying it in the backyard."
And, Barnhart says, people need to monitor portfolios regularly: "Once someone retires, they are now in the business of retirement."