Managing Retirement Assets

Your goals and level of risk tolerance are the most significant aspects of investing. They drive the investment decisions that you will make, including your asset allocation, or how you will diversify among the various asset classes. In line with the results you are seeking and in conjunction with your style of investing (aggressive or conservative), you will want to allocate assets appropriately to meet your specific goals.

Many investors, often following the advice of advisors or even TV commercials, focus their attention on specific stocks, bonds, or mutual funds. People will see a rate of return and be ready to invest without factoring in the big-picture plan. This type of investing, chasing returns, doesn’t work.

Instead, you need to ask yourself some key questions. For example: Do I need income? How much? When? Am I looking for long-term growth? How much money do I need on hand in the form of liquid assets? The answers lie within the broad investment picture. This larger picture is where you’ll need to put your focus before thinking about specific investments.

Before you invest, you will look at the various investment vehicles on a broad basis and determine how much you want to invest in each area on the basis of your needs. Start with a design based on what you need to accomplish. Don’t start by reading the most popular financial magazine and looking to buy the mutual fund that came in at number one the previous year. Concentrate on your needs. Should you put more money into equities (stocks) or into bonds? Should you consider other investment vehicles? These answers will be based on the “big picture.”

Asset allocation will vary for each individual. The idea is to allocate assets so that your goals are met and you feel comfortable with your investment strategy. After all, it’s your money, your retirement, your lifestyle. Making sure your needs are met and your level of risk tolerance is taken into consideration are the priorities when allocating your assets. Stick with the strategy that meets your needs. If, for example, you need a 7% return to make your lifestyle work, then why take on the added risk by trying for a 20% return? You do not need to take on such a risk unless your position allows for it. Besides, if you have a low risk tolerance, you will probably get apoplexy on a roller-coaster ride you don’t need to take.

No Set Formulas

Mutual fund companies today offer what are called lifestyle funds, which are mutual funds that invest on the basis of the age of the investors. They become progressively more conservative as investors get older. The problem with such funds is that no two people have the exact same lifestyle. In addition, people of all ages have different goals, needs and levels of risk tolerance. The theory of changing asset allocation strictly on the basis of someone’s age does not work for most investors.

One client of mine, for example, is in her 70s, and she’s worth more than $2 million. With Social Security and a pension, she takes only $15,000 a year from her assets, so she’s not about to run out of money. She’s investing for the benefit of leaving money to her children and grandchildren. Why should she become a conservative investor because of her age? She’s hoping to build up a sizable amount of funds to leave for her heirs.

People have very different lifestyles that need to be factored into their asset allocation strategy at any age. Therefore, age becomes just one of a number of factors when determining someone’s asset allocation. Additionally, people have very different levels of risk/tolerance, which is always a key factor when setting up an investment plan.

There is no set one-size-fits-all investment strategy. The best strategy for anyone planning to invest, whether it is for retirement or any other goal, is to do the homework and read about an investment opportunity before taking the plunge. A good financial advisor should help a client put an investment game plan in place before investing any money.

Sticking to your own set plan can take some willpower when it becomes tempting to go after a “sure thing.” As we mentioned back at the start of the chapter, chasing returns doesn’t work. Just because your next-door neighbor had a 30% return on a mutual fund doesn’t mean you will. In fact, it’s highly unlikely. It also doesn’t mean you can afford to (or even want to) take such a risk. Stick to your own game plan. There are no formulas and no “sure things” when it comes to investing.