Retirees, Don’t Get Carried Away by Nvidia. Do This Instead.

U.S. stocks are still up 13% for the year, despite the recent market turbulence. (Dreamstime)

Key Points

• Nvidia accounts for nearly 8% of the S&P 500, contributing $1.7 trillion to its $6.8 trillion increase this year.
• A 60/40 stock and bond portfolio has historically shown a 0.1% chance of negative 25-year returns, offering resilience.
• Consider rebalancing portfolios by trimming overweighted positions and rotating into small and mid-cap stocks or bonds.

Nvidia’s strong earnings report may have soothed fears about a bubble in artificial-intelligence stocks. But the market still seems to be turning skittish, with volatility creeping back up and stocks faltering in the home stretch of the year.

For retirees, it’s a good idea to have shock absorbers in your portfolio and make sure you aren’t too reliant on one hot stock or sector. Doing a portfolio checkup and making some other moves may be necessary, especially if a market downturn settles in.

Nvidia, of course, is the poster child for AI, and the chipmaker’s third-quarter earnings report indicated that demand for its chips is still quite healthy. But Nvidia now constitutes nearly 8% of the S&P 500, and it’s carrying much of the market. Of the index’s $6.8 trillion increase in value this year, $1.7 trillion is from Nvidia alone, according to Dow Jones Market Data.

As Thursday’s sharp pullback showed, that makes the S&P 500 vulnerable to a pullback if the AI trade loses steam.

Given the big run in tech, many investors may have too much exposure to the sector for a long-term balanced portfolio.

You don’t need to exit your positions wholesale, but consider trimming them and rotating into small- and mid-cap stocks, says Paul Stanley, chief investment officer of Granite Bay Wealth Management in Portsmouth, N.H. Mid-caps have lagged behind the overall market for the past few years, but they offer more attractive valuations; what’s more, many are domestically oriented industrial and financial companies that don’t have as much exposure to tariffs. Small-caps tend to do well when interest rates decline because they depend more on borrowing than their larger counterparts.

“There’s no time like the present to reduce your exposure to volatility,” Stanley says.

Also, look at your overall mix. There’s no one answer to the right mix of stocks and bonds in retirement, but the classic 60/40 stock and bond portfolio is a good place to start. A recent study from the Deutsche Bank Research Institute found that a 60/40 equity-bond portfolio has historically provided the lowest probability of a nominal loss, with a 0.1% chance of negative 25-year returns, lower even than Treasury bills.

Many retirees may still feel burned by the downturn in both stocks and bonds in 2022, one of the worst years in history for the 60/40. But 2022 was likely an anomaly caused by the Federal Reserve’s steep interest-rate hikes to combat inflation. Bonds are faring better now and seem to be back in their traditional role as ballast in portfolios. The iShares Core U.S. Aggregate Bond exchange-traded fund is up around 7% this year on a total-return basis and should continue to perform well if the Fed cuts rates (since bond prices and yields move inversely).

For a one-stop shop, consider the Vanguard Balanced Index fund, a low-cost index fund tracking the U.S. stock and bond markets with a roughly 60/40 split.

If your portfolio mix isn’t where it should be, consider selling some winners and using the proceeds to buy assets that haven’t done as well or posted losses. Actual losses aren’t as plentiful this year, with U.S. stocks and bonds both posting gains.

Stanley favors rebalancing on a regular schedule versus on a reactive basis in response to market moves. Whether you rebalance quarterly, semiannually, or annually, year end is a good time to do it.

Investors who are subject to required minimum distributions, or RMDs, can use them to rebalance their portfolios. The Internal Revenue Service requires investors 73 and over to take annual withdrawals from their traditional, tax-deferred retirement accounts and pay income tax on them. Consider taking your RMD from an overweighted part of your portfolio and, if you don’t need the money to live on, investing the proceeds in a taxable account in an asset class where you are underweight.

Don’t forget about cash. A rule of thumb for retirees: Keep a cash cushion of up to two years’ worth of portfolio withdrawals—that is, money you need to withdraw to meet your living expenses after accounting for Social Security and any other income sources. That will help insulate your portfolio from market turbulence and ensure you won’t have to sell stocks when they’re down merely to pay the bills.

“People get very excited about what their position has done for them,” says Douglas Boneparth, president of Bone Fide Wealth in New York City and co-author of Money Together.

Don’t get so attached to your winners that you neglect diversification. Cash isn’t exciting, but you’ll be glad to have it if the market takes a dip.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com