A lot of you are exceptional savers.
But as our long-term clients know, when it comes to retirement, you need to do more than just save.
The very first thing you need to evaluate is what’s going on with your investment management.
This is not limited to the allocation of your savings—which is, of course, extremely important—it includes the amounts you’ve saved, the risks you’re taking and the various investment vehicles you’re going to use to generate income.
Whether you’re still working, or you’re already retired, when it comes to investment management and your future, what should you be doing today and everyday?
1) Know Your Risk Tolerance so You Don’t React to the Market
Risk. It’s not just a question of whether you can tolerate it—it’s a matter of knowing exactly where on the tolerance spectrum you stand.
One thing your level of risk exposure should not do is change because the market is in motion.
If you’re not crystal clear about your investment risk tolerance comfort level, you may be unwittingly putting yourself, and your future, in a perilous position.
For instance, are you motivated to jump out of the market after a big correction (a drop of 10 percent, or more), or do you want to increase your risk exposure when the market is on an upswing?
This is “behavioral finance,” and it’s a serious threat to your portfolio.
Even if you think you know where your comfort zone is, it’s important to revisit it every year with your advisor.
He or she will ask the questions that help you stay on track, and that will help protect you from the emotional side of investing.
2) Clearly Identify Your Time Horizon
One of the key questions of investment management is, when will you actually need your money?
Knowing when you’ll need your money helps you decide the types of investments you’ll use, and the amount (relative to your personal tolerances) of risk you’re willing and able to endure.
- Many people think they’ll need all of their savings on the day they retire. This is not the case.
- For tax reasons, and for fiscal stability, the last thing you want to do is liquidate your investments once you stop working.
- You want your investments to keep earning income so you preserve your savings principal.
- The day you begin living entirely off the principal of your savings is the day the sand begins to run out of your money hourglass.
Again, your risk tolerance plus your time horizon are key parameters for financial decision making regarding your investments.
3) Protect Your Future by Diversifying Your Investments
For those readers who are still working, try and think outside the 401(k)/IRA retirement account box.
Having all your eggs in one basket is probably not going to give you the security you’ll need once you retire.
We’ve all seen what happens to previously exciting investments once the bubble bursts: the housing market, the tech bubble, the volatility leading up to the 2008 crash, and the fallout of the financial crisis; from first to worst in a flash.
If you know history, you probably understand that markets go through up and down cycles.
We believe that slow and steady wins the day. We believe that proper investment management considers your risk tolerance and your time horizon, and then allocates your savings inside a diversified portfolio that helps protect you from swings in the market.