When I was a financial advisor, I worked with a client who sold all of his mutual funds in his 401k in 2002 (see chart below). He did this out of fear after the 2001 stock market crash. Jim came to me in 2007 because he wanted to retire. We reviewed the amount of money that he had saved and then reviewed his retirement target date and income needs. We reallocated his 401k with mix of stock and bond mutual funds based on his retirement date. Unfortunately, less than a year later he informed me that he had a heart attack and his doctor advised him to retire. Ouch! His time on the sidelines cost him several hundred thousand dollars.
Planning for retirement can be scary. However, once you break it down into some simple strategies, it can seem a lot less daunting. Master these strategies below and you will be well on your way to a successful and happy retirement.
- Understand that Fear and Greed drive the stock market. There is a theory that every student of finance learns about called the odd-lot theory. In short, it states that small investors, like you and me, always get the market wrong. We buy when the market is high and sell when it is low. As a small investor you can overcome this by taking the Warren Buffet approach – buy when people are scared and sell when people are greedy.
- Dollar Cost Averaging is a great way to add lots of money to the market over time. Dollar Cost Averaging is breaking up a large purchase into several smaller purchases over time. For example, if you have $100,000 to invest, you could buy $100,000 in mutual funds today. However, you don’t know what is going to happen tomorrow. Will the market go up or down? Will my $100,000 turn into $90,000 or will I get lucky and it skyrockets to $110,000 over the next month? Since no one has a crystal ball, Dollar Cost Averaging allows you to purchase $10,000 in mutual funds over the next 10 months or $20,000 in mutual funds over the next 5 months. This allows you to lessen the impact or risk of a stock market crash.
- Rebalancing is your friend. Every year, you should look at your investment accounts and make sure that they are in line with your objectives. When you set up your initial investments, you set allocations between the amount you keep in Stocks, Bonds, and Cash. For example, you may allocate 80% of your account to stocks, 15% to bonds, and 5% to cash. In a year when the stock market goes up and your bonds decrease, you could end the year with 85% in stocks, 10% in bonds and 5% in cash. You will want to sell some stocks and buy some bonds. This will help ensure you are buying low and selling high.
- You still have time, but hurry! I am a master procrastinator, especially when it comes to something I don’t understand. When investing your retirement savings, you don’t need the money today. But, if you put this decision off a month will go by, and then another and then a year and then another. You won’t be prompted to do anything until another major event happens in the market.
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