How To Make the Most Out of Your Retirement Accounts
"The Do's and Don'ts of Investing for Retirement"
Diversify your portfolio. This may sound cliché but it is vitally important. Diversification acts as an insulator against the ups and downs of the market. If you own too much in any one company, economic sector, asset type, or country you are unnecessarily exposing yourself to additional risk. True diversification is when you own several different types of stocks (e.g. U.S., international, emerging market, large-cap, mid-cap, and small-cap), bonds (e.g. U.S., international, floating rate, inflation-protected, high yield, short term, etc.), and alternative asset classes (e.g. real estate, precious metals, oil/gas, etc.).
Try to time the market! Market timing is making investment decisions based on the expectation that the market will go up or down in the short term. An example of market timing is moving assets out of the market because you believe the market is going to go down, with the intent of reinvesting back into the market after the downturn. One of the biggest mistakes a person can make is trying to time the market. Whether that be moving all of your money in and out of the market or stopping your retirement contributions altogether. It is next to impossible for even the most educated and talented investors in the world to consistently time the market. There is a great deal of academic research that has proven time and time again that attempts at timing the market result in worse returns and higher risk than buy and hold strategies.
Make investment decisions based on your time horizon. There are two different phases to investing for retirement: the accumulation phase and the distribution phase. During the accumulation phase, you are continually making contributions to your accounts. If the market goes down by 10% that means you are getting a 10% discount (also known as dollar-cost averaging). Yes, your account value goes down as well, but if you have long enough to wait, the market will recover and you will be rewarded for your discipline and patience. The opposite is true during the distribution phase. As you are making withdrawals from your retirement accounts, you are continually selling. If the market goes down by 10%, you are selling at the lower price. The closer you get to making withdrawals from your accounts (the distribution phase), the more conservative you should be.
Make decisions based on emotion. This practice is easier said than done. Think back to 2008 and early 2009 which were very challenging times in the market and even most recent are the issues we had in 2020 with COVID. I personally had many long conversations with my clients about not letting fear take control. Most of them listened and were rewarded for it. For example, if you invested $100,000 in the S&P 500 on January 1 of 2020 and held it until December 31st of 2020, you would have made 18.40%. Your portfolio at the end of the year would be worth $118,399. However, at the bottom of the market in March of 2020, your portfolio value would have been less than $85,000. Please don’t misunderstand me. I am not saying that everybody should be in the stock market nor that fluctuations like the example are this drastic. The point I’m trying to make is that emotions can cause us to make bad decisions and being aware of this fact takes you one step closer to making good decisions.
Work with a professional. I highly recommend working with somebody who is a CFP® (CERTIFIED FINANCIAL PLANNER™)* and/or a ChFC® (Chartered Financial Consultant®)**. These designations show that the advisor has advanced training, is committed to the profession, and is required to do continuing education. Even if you are a do-it-yourself investor or currently have a financial advisor, why not get a second opinion from a qualified professional? You don’t have to do business with them. FSG offers a free no-obligation portfolio analysis. I can’t say everybody who does the analysis becomes a client, but I can say that everybody walks away more informed when we are done. If you are interested or just have questions feel free to contact us at (517) 347-4337 or firstname.lastname@example.org.
*CFP-a formal recognition of expertise in the areas of financial planning, taxes, insurance, estate planning, and retirement. Owned and awarded by the Certified Financial Board of Standards, Inc. the designation is awarded to individuals who successfully complete the CFP Board’s initial exams, then continue ongoing annual education programs to sustain their skills and certifications. https://www.investopedia.com/terms/c/cfp.asp
**ChFC- a professional designation representing the completion of a comprehensive course consisting of financial education, examinations, and practical experience. The designation is granted by the American College upon completion of seven required courses and two elective courses. https://www.investopedia.com/terms/c/chartered-financial-consultant-chfc.asp
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Written by: Brandon Carter