How to Avoid Ruining Your Retirement with Bad Investments

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Are the investments you made years ago holding your portfolio back from income potential?  Are the stocks you acquired in a different market putting your retirement at risk?  Do you have your money in the right type of assets for your age?

Periodic evaluation of your investment allocations can answer these questions and refocus your investment direction, if necessary.

The old adage “stay the course” may not apply when it comes to stocks to invest in to help you reach your retirement target. 

You may actually be on the wrong course depending on whether you are well invested for your age and retirement goals.  Alex Koury, wealth adviser at ValuesQuest in Phoenix, AZ says, “If you have a long time before you retire, you shouldn’t be as concerned about what’s happening in the market today.”  If retirement is decades down the road, you can afford to take on more risk.  Conversely, the closer you are to leaving the workforce, the less investment risk you would want to shoulder.

Assess your stocks portfolio to see how your investments are allocated.  Compare what is in your retirement portfolio.  If you own 30% bonds and 70% stocks, you are on a more aggressive track.  If you have more than 30% of your investments in bonds, your nest egg will be less effected by market fluctuations.  Your personal ideal ratio largely depends on when you plan to retire.  Online tools offered by your 401(k) plan adviser and other investment companies can help you examine your investments and assess your allocation ratio.

A target-date fund can provide market investors a solution to a lop-sided portfolio when assessing retirement stocks. 

Also known as a life cycle, dynamic risk, or age-based fund, a target-date fund is designed to offer a straightforward investment solution to the asset allocation ratio.  These funds, often mutual funds, automatically adjust their stock to bond ratio as an investor ages based upon a predetermined retirement age.  Buying into this type of collective investment scheme does not require the usual periodic assessment on the part of an investor monitoring how his or her own retirement assets should perform.

New School for Social Research professor of economics, Teresa Ghilarducci, says, “They’re [target-date funds] often a lot better than picking your own assets.  Humans make predictable mistakes based on their emotions.  At least the steward of your target-date fund is a professional and not susceptible to those mistakes.

Consider your actual projected retirement age when selecting your stock fund. President of retirement services at CLS Partners, Aaron Pottichen, suggests careful consideration when choosing your retirement date and corresponding fund.  Target-date funds have the built-in assumption investors will retire at 65, but, many of today’s investors will not reach their full retirement age until 67 or 68.  Claiming Social Security often provides a significant source of retirement income.  Therefore, to buy more time, you may choose to move to the next vintage fund.  You may decide to move to a 2055 fund if you were enrolled in a 2050 fund to be closer to your actual retirement age.

You could add needless risk to your portfolio by combining target-date and other funds in your 401(k) plan.  Ghilarducci of New School says, “If you add funds on top of a target-date fund, you probably will make your portfolio imbalanced.”  By paying strict attention to your investments, you can avoid this mistake; however, the effort defeats the purpose of the fund.  “If you want to pay that much attention to your target-date fund, you should do it yourself,” Ghilarducci said.

Amassing your own retirement stocks portfolio comes with more risks.  Pottichen of CLS Partners says, “If this land of investments is foreign to you and you don’t have comfort with it, you should probably use a target-date fund.”  By using a target-date fund you could avoid additional fees and overlapping investments which could offset the balance of your portfolio.

Rebalance your retirement stocks portfolio to avoid costly mistakes.

If your target of 60% stock allocation drifts upwards of 75%, your investments could take a big hit when the market is in a slump.  By taking stock growth and putting into other asset classes, you could avoid such discrepancies potentially harming your retirement fund.  Re-balancing your portfolio should be done at least annually.  Pick a target date, such as your birthday, and make it a priority, lest it fall by the wayside.  Investors who are closer to retirement and are more worried about risk should consider re-balancing more frequently, either bi-annually or quarterly.

Many factors go in to a successful retirement plan and there is no one magic formula for every investor at any age.  It’s not just about buying the hottest stocks at the best times.  How you invest, and at what stage in life, could make or break how you spend your retirement years.  By monitoring your investment ratio and re-balancing your holdings as necessary throughout the life of your portfolio, you can be poised to enjoy your own personal best nest egg.

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