Smart investing can be tricky, especially for those transitioning into retirement. How should your investing approach change and what are some important factors to keep in mind? Joe and Al give you four tips for creating a disciplined investing approach :
1) Save on a regular basis
2) Invest in stocks and bonds
3) Use low-cost funds
4) Rebalance when necessary
“Investing should be boring; if you want a little bit of excitement then take some money and go to Las Vegas. You don’t want to do it with your overall retirement plan but a lot of you are. We’ve had a nice big bull run in the overall stock market in the last several years. A lot of you might be taking on more risk than you should. You want to find that target rate of return.
You want to save as much as you can on a regular basis. Save as much as you can and continue to save those dollars. Most of us need to be invested in stocks and in bonds. This is what’s called an asset allocation approach (how much you have in stocks versus bonds), over 90% of the variance of your returns is going to be based on your asset allocation. It’s not necessarily timing the market or investing in particular stocks. We look at what the highest probability of success is, so you have to start with that target in mind and make sure that you take the least amount of risk possible to get that target rate of return. It could be 5%, 6%, 7% and so on. You want to make sure you take a look at costs. There’s low cost, there’s high cost, there’s medium size cost–this is a huge factor because it could be a major drag on your return. Fortunately, the financial services industry is not very transparent. You don’t necessarily understand what you’re paying. A lot of you who are watching this right now, if I were to ask you ‘how much are you paying in your overall 401(k) and the investments that you’re choosing?’ you might say I’m not paying anything. There’s always cost fees associated with any type of investment; you just want to identify them.
Rebalancing–this is key to start rebalancing your portfolio right now, because if you look at the big bull run, you might have started with 60% stocks, 40% bonds, but now because the markets are up over 200% you might have 70% or 80% in stocks and 20% in bonds. In my opinion, as you’re approaching that retirement date, that is taking up way too much risk in the overall portfolio. It might look good on your statement right now to say ‘hey, look at these great returns’ but we all know what goes up must come down. You want to make sure you hedge against that.”