|
|
 |
Investing in a Turbulent World
|
After five years of producing strong positive returns (from October 2002 through October 2007), financial markets are once again experiencing a high degree of fluctuation in their day-to-day activity.
The US stock market has, at times, fallen as much as 20% from its October 2007 market peak, reflecting the impact of the sub-prime mortgage crisis, as increasing numbers of borrowers are finding it difficult to repay their loans.
The ripple effect of this development has been felt not only by the housing market - one of the most significant sectors of the economy - but throughout the global financial system. Given the current turmoil, it's understandable that investors might have similar concerns about the declines in value of their retirement assets.
But in times of market uncertainty, it's especially important to keep a cool head. So what should you do with your retirement savings? Answer: return to the fundamentals!
While market conditions have changed, your goals most likely have not. So your first step is to make a realistic assessment of where you are in relation to where you want to go. The following is a list of guidelines to help get you from "here to there", which are classic in their timelessness, because they apply to most investment situations.
- Stay the course. Now is not the time to make drastic changes in your investment portfolio - such as converting all your stocks to cash, or the opposite, investing only in stocks. It is the time to concentrate on financial planning. Your investment decisions should be based upon your goals, your time horizon and your tolerance for investment risk — but not the daily gyrations of the financial markets.
- Make a plan, or update your current plan. Use the FRS to plan your future! Take advantage of the free resources available through the FRS to find out how much you'll need for retirement, and how your FRS retirement benefits, Social Security and outside savings can work together to give you the retirement lifestyle you want.
- Reexamine your goals, assumptions and expectations You may need to adjust some or all of them, keeping in mind that everyone's situation is different. Your ability to meet your retirement goals is based on the following factors:
- Investment returns: Many financial experts expect common stocks to return about 7-9%, and bonds to return about 5-7%, over the long term.
- Personal savings rate: Most financial experts feel you need to save 8-10% or more of your income towards retirement. Most families only save about 2% of their income.
- Retirement age: More and more people are retiring later in life. When do you expect to collect Social Security?
Note that while you have no direct control over investment returns, you hold the power to change your personal savings rate and/or your retirement age.
- Diversify your portfolio. A diversified portfolio of stocks, bonds, TIPS and cash can help smooth out the market's ups and downs. In recent years, bonds, TIPS and cash outperformed a portfolio made up of only stock funds. With a diversified portfolio, held over a long period of time, you have a better chance of ending up with more "winners" when you actually need the money. In other words, avoid the temptation to make investment "bets" by "putting all your eggs in one basket".
- Risk is a fact of life. You need to be willing to take some short-term risk to achieve long-term growth. Remember: you want your retirement savings to at least keep pace with inflation, which looms as a larger investment risk over the long run. And historically, over the long-term, stocks have handily outpaced bonds and - more importantly - inflation.
- Rebalance and strengthen your portfolio. Financial experts have shown that about 90% of your investment success comes from putting together the right mix of investments, or asset allocation, for your savings. It's easy for your actual asset allocation to drift away from your target allocation in times like these, such as the recent stock market decline. You may need to make adjustments to get back on track. So be sure to:
- Include an appropriate amount of stocks or stock funds in your portfolio mix. Over the long term, stocks provide higher (and inflation-beating) returns than bonds or cash, although they may involve greater risk of short term market loss as well.
- Consider investing in balanced funds, which are already diversified for you. A balanced fund can offer a simple and inexpensive way for you to follow a long-term investment strategy, because the fund rebalances itself over time. This can be very useful if you're not comfortable with selecting investment funds, or if you don't have a detailed plan with a target allocation mix.
- Make sure you're making appropriate investment fund choices - look for low fees and good long-term results with acceptable risk.
- Take advantage of tax-deferred savings opportunities in your personal savings plan. Current tax law allows you to put away up to $5,000 a year (or $6,000 a year if you're age 50 and above) in Individual Retirement Accounts, or IRAs. And through automatic payroll deductions, you can invest up to $16,500 a year (or $22,000 a year if you're age 50 and above) in other qualified plans such as 457, 403b and 401k plans, if offered by your employer.
- Believe in the future — and in yourself. Investments in stocks, bonds and cash have grown over longer periods of time. Financial markets have always been volatile over short periods of time, but have rebounded from market downturns. Your objective, like that of all investors, is to develop and follow a sound investment strategy - and have the patience - to reap the financial rewards you want.
|
|
|
|
