Does the phrase “investing for retirement” make you cringe? For many of us, the extent of our long-term investing activity includes:
Signing up for a 401k payroll deduction through work, and
Occasionally glancing at the balance (which never seems to grow, leading to feelings of helplessness and further avoidance of any kind of investing activity).
Understanding the financial market and the many investment options available can be overwhelming, and we’re often left wondering if it even makes a difference to try to invest strategically. We avoid the issue altogether and tend to miss out on opportunities to understand and adjust our investing strategies.
You may not consider yourself to be an investor, but saving for retirement makes you a long-term investor, and it is important (and easier than you think) to you shape your investment strategy by revisiting a few fundamental investment concepts every 6 to 18 months, regardless of market conditions.
If you really want to dig into your financial situation, you may want to talk to an expert (like our own Brandon Toft), but there are some simple steps you can take to get a better handle on what you’re currently doing, as well as how you can make changes to improve your strategy going forward. Here are some ideas to get you started:
Figure Out What You’re Invested In
If you have no idea where your 401k payroll deduction is going, talk to your HR department and/or check out your company’s benefits website to see exactly what it is you’re investing in. Do you have any other money set aside for retirement? Be sure to consider the whole picture, not just your 401k.
Revisit Your Risk Tolerance
In general, the further you are from retirement, the more risk you can tolerate. What level of investment risk is suitable for you? Are you an aggressive investor, or has your personal situation changed since the last time you evaluated your risk tolerance? Are you still a long-term investor, or are you getting close to retirement and therefore need to be more conservative? If your needs have not changed and you still are investing for the long term, this may not be the time to change your investment mix.
Every asset class (investment category, e.g. stocks, bonds, money market) has its ups and downs. If your portfolio is well diversified, you will be in good position to benefit when an asset class excels—as opposed to chasing returns after the fact. For example, when growth stock funds were excelling, value funds were not; when stock funds declined, bond funds did well. Over the course of time, a well-diversified portfolio can provide increased performance while decreasing risk. In addition, diversification is a disciplined approach to investing, rather than relying on emotions or impulse.
Don’t Chase Returns
Now that you’re paying more attention to your investment strategy, don’t give in to the temptation to buy the latest “hot stock” everyone’s talking about. This is a risky strategy, as such stocks may be overvalued and end up losing money instead of making it.
Keep Investing Through Payroll Deduction
When the market is down, you are buying more shares or units for your dollars. Investors should actually feel good about buying in when the market is low; ideally, when you reach retirement, those shares will be worth more.
Invest for the Long Haul
Remember your long-term goals and invest for the long haul, rather than for short-term market swings. Statistics show that staying the course, rather than switching in and out of funds, is typically the wiser choice. Often, investors make the mistake of selling when the market is declining, and buying back when it is going back up. This is the opposite of what they should be doing to maximize returns.
What About Current Events?
The uncertainty surrounding current events poses significant challenges for investors. One thing we do know: the stock market hates uncertainty. Thus, having diversification of investments is key! A mix of investments—cash, bonds, stocks—will help minimize the risk of a large loss.
Though a large event may cause a serious market reaction in the short-term, often the market balances out after the event has passed. The secret to weathering all types of market swings is to resist the temptation to panic or overreact. Stay disciplined, keep a long-term approach and maintain a diversified portfolio balanced appropriately for your particular risk tolerance. These basics of long-term investing can be your blueprint for not just surviving, but succeeding in the market.