Why You Need a Serious Retirement Investment Strategy
by Keith A. Rhodus on Mar 29, 2018
With rising retirement costs, longer life spans, and the need to rely almost exclusively on one’s own assets for income, there is little margin for error in investing for retirement. When we’re talking about securing a comfortable income that needs to last as many as 25 or 30 years, mistakes made early on can be magnified to tragic proportions. It’s becoming increasing important to forge a serious, sound retirement investment strategy as early as possible.
Biggest Retirement Investment Mistakes to Avoid
Investing too conservatively/aggressively – If you don’t have a clear retirement goal you might be either to cautious of to aggressive in your investment approach. Either approach can be ruinous for an investment portfolio that is expected to generate a lifetime of income. Investment risk is necessary to achieve good returns over the long term, but understanding how much risk is tolerable and how to mitigate risk through an investment strategy will provide much more stable and certain results.
Trying to time the market - Contrary to the claims of many celebrity market gurus, no one can predict, with any degree of certainty, changes in market direction. Yet, there are still a number of investors who hold onto the notion that they can call the market shift and make the right move at the right time. Quite simply it can’t be done with any degree of consistency.
Trying to pick winners – Decades of academic-based research has revealed that investors who try to pick individual stocks or who try to pick mutual fund winners stand no better chance of consistently outperforming the markets than investors who, with far less risk and costs, simply invest directly into the S&P 500 index.
Retirement Investment Strategy Essentials
Short of a serious retirement investment strategy formed with sound principles and executed with proven practices, retirement investors are prone to act irrationally in the face of short-term fluctuations in the financial markets. Investors who are able to stick to a well-conceived, long-term strategy, with clearly defined goals tend to outperform those who tend react to the short-term movements of the market.
By employing these sound investment practices, investors with a long-term investment timeline can reduce the amount of volatility that affects their portfolio while enhancing their opportunities for capturing returns wherever they occur.
Central to any investment strategy, regardless of an investor’s risk comfort level, is the long-term mix of assets. Based on the fact that different asset classes perform differently under different conditions, an asset allocation strategy attempts to combine them in a way that provides balance in the portfolio. For example, when stocks aren’t performing well, bonds tend to perform well, so having both assets in your portfolio can diminish the impact of declining stocks. To a great degree, an investor’s selection of asset mix has a big impact on long-term investment returns.
Considering that it’s virtually impossible to consistently pick the winners, the sound approach to investing is to diversify your assets across asset classes, market sectors, and investment types. That way, your portfolio is more likely to capture returns where they occur and minimize portfolio volatility.
A big mistake some investors make is to allow their “winners” to keep going while dispatching their losers too quickly. This can lead to an unbalanced portfolio and increased exposure to risk. Each year, investors should rebalance their portfolio so that it remains within their asset allocation target range. That means selling some of the winners, and reinvesting the profits into investments that have underperformed (but still have upside potential). This approach can ensure you capture your gains while continuously expand your opportunities for growth.
You Don’t Have to Go it Alone
Developing, implementing and managing a sound, long-term retirement investment strategy can be a daunting task for most people; if not because of the knowledge and expertise required, it is the difficulty in maintaining the discipline and patience it requires. A good financial advisor can bring objectivity and expertise in helping you construct the optimum portfolio for your needs. More importantly, they can provide the coaching most people need to avoid acting irrationally during the best of times and the worst of times.
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