Far too often, I see clients who come to me a few years before they retire only to realize that they’ve done next to nothing in the way of managing their current investments or savings. If you’re like a lot of folks who have been building their retirement by "only" contributing to a 401(k) or IRA, and then just letting that money “do its own thing” off in the distance, you may not be doing yourself any favors.
There aren’t many things that can derail your retirement plans faster than poor investment management. This is not limited to merely the allocation of your savings—which is, of course, extremely important—it also includes the amounts you save, coupled with the various vehicles you utilize to prepare for the future.
It’s critical not to be short-sighted when it comes to money matters—especially when we’re taking about your retirement. Although short-term investments can promise big returns, there are absolutely no guarantees, and as a general rule, the greater the hoped-for return, the higher the risk of the investment. Taking risks outside your comfort zone not only puts your hard-earned retirement nest egg in jeopardy, it can be extremely stressful.
Take the time to think things through. Assess what your financial picture might look like over the next few years and even decades—how much money will you need versus a reasonable assessment of how much money should be coming in—and have a frank conversation with yourself to determine just how much risk you’re willing to endure to get to where you want to be.
1. No No: Reacting to the Market
Risk: It’s not just a question of whether you can tolerate it—it’s a matter of knowing exactly where on the spectrum you fall. And keep in mind, our degree of risk tolerance changes according to the current economic climate, our age, and where we are in our lives financially.
If you’re not sure about your own investment risk tolerance level, you may be unwittingly putting yourself in a dangerous position. When the market fluctuates, and you find the ups and downs nerve-wracking, you are prone to making emotional decisions—selling when the market hits bottom, or buying when it’s at its peak. This is a common aspect of “behavioral finance,” and it’s a serious threat to your portfolio.
Even if you think you know where your comfort zone is, it’s important to revisit that every year with your financial advisor. Times change, and so do you. Your investment choices need to reflect that.
2. Identify Your Risk Spectrum for Investing
When will you actually need your money? Many people believe they’ll need all their money on the day they retire, but that’s typically not the case. You don’t want to liquidate your investments just because you stop working. You want that money to continue to work for you. If you haven’t thought this through—make this priority #1 before you retire. Your risk tolerance plus your time horizon are your key guideposts for financial decision-making regarding your investments.
Once you know how much market uncertainty you can stomach, you can be clear about your time frame—how long you can wait until you allow yourself to utilize your investments, or at least start drawing on the interest. Be mindful, not emotional.
3. Diversify, Diversify, Diversify
Here’s the rub: Your projected time horizon probably does not equal your actual time horizon. The reality is, while you’ll likely need some money once you retire, you'll also want your money to continue to grow for years or even decades. That’s why we recommend managing your investments with a long-view approach and proper diversification.
One thing I cannot stress enough is to try and think outside the 401(k)/IRA retirement account box. Having all your eggs in one basket—even if it’s a very large basket—is not going to give you the kind of security you’ll need going into retirement. We’ve seen what happens to good investments once the bubble bursts: the housing market, the tech bubble, the volatility leading up to the 2008 crash, the fallout of the financial crisis. If you know history, you probably understand that markets typically go through up and down cycles. We believe that slow and steady wins the day.
Strategize with your advisor now to help ensure that you’re covered.