You've probably heard one these before: "Don't put all your eggs in one basket," "the magic is in the mix," "too much of anything isn't good for you," "if it seems to be good to be true, it probably is."
When it comes to investing, we can glean something from these age-old pearls of wisdom. Let's take a close look at how you can help keep your nest egg from getting cracked in these turbulent times.Why does any of this even matter to you? Current retirees are the first generation fending for themselves financially. Corporate pensions have all but dried up, and many question the health and longevity of Social Security. Guardsmen do have an opportunity to earn a pension with 20 or more years of service. Social Security and a military pension help fill that retirement bucket. Along with that, we need to save and invest. Your retirement accounts, such as the Thrift Savings Plan and a Roth IRA, comprise the portfolio we're talking about keeping balanced.
Asset allocation is an appropriate mix of stock, bond and cash investments based on your goal, risk tolerance and time horizon until retirement. Too much or too little of any of these components puts your investments at risk. Too much stock exposure and a market slump could put your retirement dreams on the back burner. If you're overweight in bonds and cash, inflation could erode the purchasing power of your portfolio. When it comes to building your portfolio, one size does not fit all. Your friend or neighbor may be the same age with the same goals and may also be invested much more aggressively or conservatively than you are. An important point: The asset allocation you choose needs to work for you during good or bad market cycles, because it will help you avoid a knee jerk reaction - like selling out low - when something goes wrong.
Diversification is a slightly different animal. It's a risk-management technique mixing multiple investments in your portfolio. In the stock arena, it may include Blue Chip, smaller company and international company stocks. The bond allocation may include treasuries, corporate bonds, high yield bonds and some cash. Rather than trying to read your crystal ball and guess which investments will do well now and in the future, a diversified portfolio will typically result in some investments that do well, while others struggle.
Here are some broad guidelines for you, as you set out to find the magic:It takes time. I've said many times that "it's not market timing, but time in the market" that makes the difference. While I believe this to be true, I also think it's critical to align your investment selection with the time frame of the goal for which you're investing. Multiple goals will call for multiple asset allocation strategies. For example, money set aside for an upcoming big purchase (trip, car, home down payment) in the next two or three years should be invested in a very stable and conservative manner with little to no risk. This includes products like savings accounts, money markets, certificates of deposit (CDs) or short-term bond funds. On the other hand, if you're investing for retirement and have 20 or 30 years to go, you should definitely consider investing in U.S. and foreign stocks in that portfolio.
Re-balancing. Once you build your portfolio it's not "fire and forget." Each year you should evaluate your portfolio and consider rebalancing to avoid taking any unintentional risk. For example, if your appropriate asset allocation is 50 percent stock and 50 percent bonds, you choose a day of the year (your birthday, anniversary, etc.) to bring those portfolio percentages back in line. For example, if the stock market did well and your stock exposure grew to 60 percent, you should shave off that 10 percent and buy into what didn't do so well, ie, bonds. This helps ensure that you buy low and sell high.
Remember. Don't let an economic crisis and/or a bear market drive wholesale changes in your portfolio. Sometimes a little tweaking is appropriate, but it's best to get advice from a financial professional before you make moves that could impact your ability to reach future goals.
Legal Disclosures:There are inherent risks associated with investing in securities, including possible loss of principal. Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability.
Asset allocation does not protect against a loss or guarantee that an investor's goal will be met.
Diversification is a technique to help reduce risk. There is no absolute guarantee that diversification will protect against a loss of income.
As interest rates rise, existing bond prices fall.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNERTM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
USAA means United Services Automobile Association and its affiliates.
This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional.USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers. USAA Financial Planning Services® refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner TM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.