By the time you’re in your 50s and 60s, you’ve probably been saving for decades, and may be well on your way to a secure retirement. But don’t get too comfortable—now’s not the time to take your eye off the ball. Maintaining the right blend of investments will help keep the momentum going in your portfolio, while also reducing investment risks as you get closer to your transition.
“No matter what you do, you should have a plan,” says Thomas Schneeweis, emeritus professor of finance at the University of Massachusetts-Amherst. “When you think about the future, remember that you need to keep growing your savings, while also protecting what you’ve already accumulated.”
Continue to pursue growth. As retirement draws near, you may be tempted to shift into preservation mode, with a portfolio that emphasizes the stability of bonds or the safety of insured CDs. With fewer years of working (and saving) in front of you, it’s understandable that you’d be more nervous about market declines—even short-term drops. It’s still critical, however, to keep some stocks in your portfolio to take advantage of their inflation-beating growth potential. After all, you may need to fund a retirement that lasts three decades or longer. For this stage of your life, opt for an asset allocation plan that’s tilted toward stocks while also including a substantial investment in bonds.
Keep it diverse. When you divvy up your savings, make sure to diversify your assets. Broadly speaking, stock and bond prices tend to move in opposite directions. Investing all your money in one asset class makes your portfolio more vulnerable if that category trends lower. By opting for a mix of investment types—stocks, bonds, real estate and cash, for example—you can chart a smoother ride through choppy markets. Even within investment categories, it’s worth keeping a diversified portfolio of different kinds of stocks and bonds. That way your risks are reduced even further, no matter how the market moves.
Think about risk. Make sure your portfolio takes into account your appetite for risk. Some people have a harder time coping with market declines. If you’re the type to lose sleep over volatile markets, consider allocating more of your retirement savings to cash, high-quality bonds and U.S. Treasury instruments. But know that you’ll likely have to increase your savings rate to make up for the slower growth you can expect from conservative investments. “This is especially important for older investors,” cautions Schneeweis: “Because you’re going to be earning less, you need to focus on protecting what you already have.”
Outsource your portfolio. If the idea of building and maintaining a portfolio sounds like a chore, consider a target-date fund. These investments are set up to automatically become gradually more conservative as your retirement date nears. In other words, target-date funds let you outsource the task of reviewing and resetting your investment allocations. For some people, though, having a trusted advisor handling this task is more valuable than the control gained by managing a portfolio by yourself.
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Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money. Diversification does not ensure against loss and does not assure a profit.