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There is a general consensus with investment advisors when it comes to the important elements regarding advice for their mutual funds. First, any such investment advice that matters should start with a custom-tailored financial profile. This profile should include the basics, such as:
These pieces should be the building blocks for any portfolio that an individual will use to fund retirement.
In my opinion, target retirement age less an investor’s age is the single most important factor when constructing a suitable retirement portfolio. And all clients should be shown the trade-offs for taking more or less risk now and the impact of these decisions on the years later.
But, there is always an exchange when it comes to investing for the future. An an investor cannot have it all. Risk is always present. And often, it simply boils down to which type of risk the investor is willing to assume.
For example, if an investor wants guarantees and safety currently, he or she has most likely settled for returns on their money that is less than average. This increases the risk that, over time, their retirement funds may not grow to a level that would sustain their retirement life with a standard of living that they have grown accustomed to. And that is a very real risk, albeit a less than obvious one.
On the other hand, many investors are less concerned than they should be with their investment choices today. No investor in the world knows completely when another stock market bubble has formed and is primed for a burst. All this to say, not only is risk always present, it is not always obvious from the direction that it comes.
The Single Most Important Piece of Investment Advice I Could Ever Make.
If an investor is in their early 30’s and has 30 years until retirement, he/she should be encouraged to take a little risk. Odds are they will be rewarded for it. This is not always true of course, but it has been shown to be somewhat true of the past. Of course, as the investor ages, the risk should be reduced with time.
If, on the other hand, an investor is in their 50’s or older, the bulk of risk should be taken off the table. Finding adequate financial resources during retirement is tricky enough without having half of your money lost in the stock market just before retiring. In my humble opinion, the biggest mistake I see investors make in their retirement accounts is not removing enough risk from their portfolios just before and just after retiring.
Here’s a question you should ask of yourself. Which would affect your real life more…..
Here’s my point. Many investors don’t fully appreciate that a significant loss of assets will cause real change in one’s life. On the other hand, real life adjustments don’t typically follow when investors find themselves with large increases in their portfolio.
Did you get that? In real life, substantial increases in one’s portfolio generally do not make a large difference in the way that investor lives life. Usually there are few, if any, significant changes and life goes on.
However, when an individual near retirement loses substantial retirement funds, the loss tends to affect everything. The retiree may find themselves looking for another job. She/he may find themselves selling collectibles just to pay the mortgage. Life tends to be quite different than it was before the loss.
How do I Protect My 401k?
So, what if you find yourself near retirement and you want to protect your 401k. What do you do? Here are three important concepts to keep in mind.