Yahoo Finance As You Near Retirement, Capitalize on Market Opportunities
At the end of 2014, there was a steady stream of reporting around the strength of the U.S. economy: the Dow Jones industrial average and Standard & Poor's 500 index reached new highs in the fourth quarter of 2014, the Nasdaq Composite index hit its best point since the 1990s technology bubble and the U.S. Bureau of Labor Statistics' December 2014 job report showed this past year was the strongest for job growth since 1999.
Moving into the first quarter of 2015 however, investors were seeing a significant amount of volatility, due to corporate earnings, unsteady oil prices and changing market landscapes overseas, in Europe and the Middle East. Although that volatility has subsided in recent weeks, the rapid increase in activity and volatility in early 2015 may cause Americans, especially those nearing retirement, to be hesitant to invest, since they have flashbacks to losses incurred during the Great Recession.
However, a defensive posture can come at its own cost. Preretirees are at risk of missing opportunities to potentially grow their portfolios and bolster their retirement savings by playing it too safe. A 2014 Voya Financial study found that nearly half (48 percent) of workers consider themselves to be moderately or very conservative investors. Given this information, here are three tips to consider if you are nearing retirement, to help you take a smart approach to growing your nest egg.
1. Determine your risk tolerance. Many people nearing retirement think now is the time to pull back and be conservative with their investments. Although it's true you no longer want to have the portfolio of a 30 year old, it doesn't mean all "risks" are bad. When the market is doing as well as it has, you should find ways to take advantage and make your money work for you. By having all of your savings in cash, you risk missing out on potential growth opportunities.
Before jumping into the market though, it is a good idea to sit down with your financial advisor to determine your risk tolerance. If you are only a few years from retirement, you may be looking for strong and steady, as opposed to quicker but high-risk investments. The most important part of entering the market is to be comfortable and confident in your decisions. Remember too that investments can become out of balance over time, due to the ups and downs of the market, so periodic rebalancing is an important step to maintain a portfolio that fits your risk tolerance.
2. Then diversify. No matter how risk tolerant or averse you are, diversification is an essential part of building your portfolio. A comfortable balance for later-stage preretirees may include a mix of fixed income, bond and equity investments. With the equity portion of the portfolio, preretirees may want to consider allocating 80 percent to slower-growth, but solid stocks and 15 to 20 percent to potential domestic and global growth opportunities. based on their personal risk tolerance and financial situation.
This allows you to have one foot in investments with greater upside potential (though more risk), while still being firmly rooted on solid ground with your nest egg. Also, a mix of various stocks will protect you from being too heavily weighted in one sector of the market, thus lowering your risk exposure.
Another important part of diversification is to be sure you are looking at your portfolio as a whole, rather than on a stock-by-stock or fund-by-fund basis. When choosing a fund to invest in, for instance, many investors will look at Morningstar rankings.
If you are only choosing your investments based on rank however, you'll only be investing in funds that previously performed well, and may be missing out on some new up-and-coming fund managers or styles. Rather than "navigating by the rankings," look at the different types of investment options offered by each fund, and then determine how you can best spread your money across a range of areas, as a strategy helps to further bolster your growth.
3. Sit back and focus on the long term. Now that you know your risk tolerance and have built a diversified portfolio, you need to step back and let the market take it from here. Do not trade in and out of stocks based on day-to-day highs and lows. Stay the course, rebalance annually (at a minimum) and trust that, by diversifying and spreading your exposure out across a range of equities and fixed-income bonds, you are putting yourself in a strong position as you near retirement.
Investors can get caught up watching stock tickers go up and down on their television screens or mobile devices. A volatile day in the markets is generally a poor reason to immediately sell holdings in a portfolio -- and may lead to significant losses that could have been avoided had an investor remained calm and in the market.
On rocky market days, it's important to remember that, as you prepare for retirement, every strategy and investment you have chosen has been made with long-term growth in mind. Check in with your financial advisor before making any changes to your holdings. One down day in this market may not be indicative of broader performance issues.
Retirement is sure to be an exciting next phase of your life, allowing you to take advantage of new opportunities and hobbies that you may not have had time for while you were working. Prepare your finances and set yourself up well for your golden years. With U.S. markets continuing to look strong for 2015, you don't want to miss out on growing your portfolio and setting yourself up for a long and prosperous retirement.
The information and opinions presented here are for general information only and are not intended to provide specific advice or recommendations for any individual.
Tom Halloran is president of Voya Financial's broker-dealer, Voya Financial Advisors, Inc. Halloran has over 25 years of experience working with financial advisors in various product, marketing and sales leadership roles. With a vision to be America's Retirement Company, Voya Financial is composed of premier retirement, investment and insurance companies serving the financial needs of approximately 13 million individual and institutional customers in the United States. Voya Financial Advisors is a top-tier broker-dealer with over 2,400 registered representatives across the country.
More From US News & World Report
