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Investments > Investment Basics
You're already saving for retirement, but saving
is only part of the equation. Not only do you need to set money aside, you
also need to decide how to make that money work for you. In other words,
you need a retirement investment strategy.
There are three key factors to think about when mapping out the strategy that works best for you.
Goals — What are your plans for retirement? Thinking
about the lifestyle you want in retirement can help you determine how much
you need to save and the kind of return you need on that money.
- Your cost of living may be higher if you spend your time traveling or move to a more expensive part of the country.
- Your cost of living may be lower if you plan to relax or move to a less expensive part of the country.
Time Frame — Is retirement a few short years away or decades down the road? How soon you need to start relying on your retirement savings plays a big role in the types of investments you choose.
- If you're close to retirement, stable investments that preserve your savings may be more attractive than riskier investments with higher growth potential.
- If retirement is seven or more years away, you may want to take on greater risk for potentially higher returns since you have more time to overcome any downturn the market could take.
Risk Tolerance — What's your comfort zone? No matter how much money you need to meet your goals or how much time you have until retirement, it's important to find a level of investment risk you can tolerate.
- If it doesn't bother you that your savings could vary as much as 10% or 20% over a short time, then investment options with higher risks and higher potential rewards might be right for you.
- If market fluctuations keep you awake at night, you may want to opt for investment options that offer more stable, reliable returns.
Levels of Risk
Conservative
You're not comfortable with risk or don't need to be aggressive with your
money. The predictable rates of return in fixed-income investments — bond
funds, money market accounts, and fixed accounts — make sense for you.
Moderately Conservative
A measured level of risk is okay with you. A small percentage of stocks can be mixed in your portfolio along with the fixed-income options.
Moderately Aggressive
You're somewhat cautious but in search of higher returns. Stocks, particularly large, blue-chip domestic stocks, should play a big role in your portfolio.
Aggressive
You're looking for the highest possible return in spite of short-term risks. Most of your portfolio should be in stocks, with a high percentage in small cap and international stocks.
If you're ready to map out your investment strategy, consider talking to
one of our financial representatives. They'll take your goals, time line,
and risk tolerance into consideration and help you structure a portfolio
that fits your needs.
Asset Allocation
In a nutshell, asset allocation is the strategy of spreading your savings out across a variety of investments to reduce your risk. The idea is to control risk and improve your total return over time. Asset allocation does not guarantee that your investments will earn more. But investing in different asset classes can help shield you against the possible poor performance of a single investment.
How important is asset allocation? Experts agree that up to 92% of your investment's performance depends on where you invest your money. You can think of investing in terms of the three "W's"*:
- Where (Asset Allocation): 92%
Where you put your money, the type of investments you pick, has the most significant effect on your investment results.
- Who (Specific Investment Manager): 6%
Most qualified investment managers achieve similar results with similar types of investments, when averaged over time.
- When (Market Timing): 2%
The market moves so fast, that it's too difficult for most people to gauge. By the time you decide to switch investments, the market has probably changed again.
* Source: Study of 91 large pension plans over 10 year period. Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower, "Determinants of Portfolio Performance," Financial Analysts Journal, July-August 1986, pp. 39-44; and Gary P. Brinson, Brian D. Singer and Gilbert L. Beebower, "Revisiting Determinants of Portfolio Performance: An Update," 1990, Working Paper.
Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide financial, legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.
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