Simple strategies for protecting what you’ve earned

Investing and Retirement Planning

You work hard for your money—income that needs to both support your current lifestyle and serve as the foundation for your future. From funding higher education expenses to ensuring a comfortable retirement, your long-term savings will be the fuel that drives what you’re able to achieve. It’s simply far too important to neglect. Want to be a more thoughtful investor? You’ll be well on your way by adhering to the following five basic tenets of investing.

  1. Be smart—take advantage of every opportunity you get for tax-deferred savings. It may require some short-term belt tightening, but try to max out your retirement plan contributions. If you can’t, make sure that you’re at least deferring enough to take full advantage of any company matching dollars that might be available (it’s free money). Also, try to fund the maximum $6,000 amount allowed in an IRA this year ($7,000 if you are age 50 or older), even if your income exceeds the limits for receiving a tax deduction. Over the long haul, the power of tax-deferred growth can be your portfolio’s best friend.
  2. Be disciplined—we all have the tendency to overreact to short-term market fluctuations, especially when they’re extreme. But it’s important to keep in mind that significant corrections are an essential part of normal, healthy markets. There’s a reason why Dalbar’s most recent annual Quantitative Analysis of Investor Behavior study found that while the S&P 500® has posted an average annual return of 6.06% over the past 20 years, the average investor has only managed a 4.25% average annual return over the same period.Disclosure 1 Trying to time the markets rarely works. Instead, consider using a dollar-cost averagingDisclosure 2 approach to help smooth out the effects of market volatility. 
  3. Be balanced—most investors realize the inherent risks of holding too much of a single stock in their portfolio, being over-weighted in a single sector, or simply not diversifying. But few realize that being too conservative can be nearly as damaging. Especially given current low interest rates, an investment portfolio that’s too concentrated in cash, CDs, Treasury bills and other low-yield securities runs a very real risk of actually losing ground to inflation. Work with your advisor to ensure that you have a well-diversified portfolio with a risk profile that appropriately corresponds to your goals.
  4. Be prepared—make sure to keep enough cash on-hand for emergency expenses. As a general rule of thumb, try to maintain a minimum of 6-12 months of living expenses in cash to protect against an unexpected crisis like a job loss or to fund a major expenditure. Why is cash on-hand so important when there are plenty of other assets in your portfolio? Because it prevents you from having to sell portfolio holdings which could adversely impact your asset allocation and potentially trigger undesired capital gains taxes.
  5. Be vigilant—a typical ‘buy and hold’ investment strategy often results in equities gradually becoming a larger and larger percentage of your overall portfolio allocation because of their historically higher returns. Over time, what began as a 60/40 stock to bond target allocation can soon become 80/20 or 90/10, leaving you with far more portfolio risk than you intended. That’s why it’s important to periodically rebalance to help minimize unintended risk and keep your portfolio properly aligned with your goals.

When you invest, it's impossible to avoid risk entirely. But a well-allocated and diversified investment portfolio that’s aligned with your unique goals is a great start. Remember to be smart, disciplined, balanced, prepared and vigilant. And most importantly, don’t forget Warren Buffett’s advice: "do not save what is left after spending, but spend what is left after saving.

Ready to build a more thoughtful, risk-appropriate investment portfolio? 

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