Investing in Your Employer-Sponsored Retirement Plan
1. Set a Goal: The first step in investing is to set a goal. For instance, are you looking for growth, do you want to preserve your principle, or are you focused on income? By determining what you're trying to achieve, you can create a strategy to help you invest with confidence. Other considerations for setting your goals should include your current age, time until retirement, risk tolerance, investment style, family dynamics, previous investment experience, and income needs, to name a few.
2. Determine Your Risk Tolerance: A common mistake made by many investors is taking too much risk. This often leads to selling when the market is down and buying when the market is up. If you take the time to think through your attitude toward risk, you may be able to reduce your risk of improperly timing the market. Start by taking a risk tolerance questionnaire. Be careful, however, that the results make sense to you. In the end, only you can decide what level of volatility you are comfortable with. No one else can decide that for you.
3. Research Your Options: These days, most employer-sponsored defined contribution retirement plans offer two types of investment options: a "do it for me" asset allocation or time target approach and a "do it yourself" route by offering choices between a broad array of investment options. Your enrollment kit or vendor's website should provide you with the research tools you need to make informed decisions. If not, contact us today, and we may be able to offer you additional research materials.
4. Avoid Timing the Market: Investing can trigger all sorts of emotions. When returns are rising, you may feel confident, secure, and happy. But just as markets move in cycles, so do emotions. When returns fall, investors' emotions often do, too. Research indicates that markets typically see net inflows during times of strength and stability, whereas markets typically experience net outflows during times of weakness. The result: the average investor buys high and sells low. More important, research indicates that these investors typically miss significant portions of future recoveries.1, 2, 3
5. Maintain Exposure to Multiple Asset Classes: Have you ever heard the old saying, "Don't put all your eggs in one basket?" By utilizing an asset allocation technique, you are able to align your protfolio with your investment goals and maximize return potential for a given level of risk. According to John Hancock, 4.6 percent of returns can be attributed to security selection, 1.8 percent to market timing, and 2.1 percent to other factors, but 91.5 percent of the variability of portfolio return is due to asset allocation.
6. Diversify, Diversify, Diversify: Many investors think that owning five different investments means they are diversified. This isn't necessarily the case. Depending on your risk tolerance, diversification means having exposure to various sub-asset classes, styles, and sectors (i.e., large-cap, mid-cap, small cap, growth, value, international, government bonds, municipals, corporate bonds, specialty investments, etc.). Keep in mind that if you choose a "do it for me" approach, you may be hiring a professional manager to ensure that you are properly diversified and allocated properly. If you chose the "do it yourself" approach, however, you will have to constantly monitor your expsoure to various asset classes, ensure that you are diversified, and reallocate regularly to ensure that you always maintain the correct amount of risk.
7. When in Doubt, Ask for Help: Keep in mind that your vendor may be able to offer guidance, research, and other tools to help you make proper investment decisions. If you are a participant in an employer-sponsored plan managed by Grinkmeyer and Leonard Wealth Management, we may be able to offer you specific investment advice. Learn more.
1 Investment Company Institute
2 Morgan Stanley Capital International
3 Ned Davis Research, Inc.
Keep in mind that diversification and asset allocation techniques do not guarantee a profit nor do they eliminate your risk of loss