FINANCIAL FOCUS
Act Your Age
In this installation of Financial Focus, we will discuss the topic of age-appropriate investing. As always, we will provide some education and commentary for the inexperienced and/or uninformed.
In our publication When to Buy and When to Sell: Combining Easy Indicators, Charts, and Financial Astrology (available on Amazon), in Chapter 1, we introduce the concept of Human Emotion and Market Psychology. Setting your retirement/long-term portfolio to an age-appropriate strategy is common, and can be re-assuring, as it prevents panic judgments and ill-advised decisions. Younger individuals generally have more time for higher risk assets, however it is always wise to be familiar with your investments, as that risk level can change at any time.
Retirement accounts, especially 401k’s, are generally set up based on one’s expected year of retirement. Whether Traditional, Roth, Self-Directed, and/or employer based, fund managers generally follow the same approach, based on a proportioned balance of stocks, bonds, and “other” assets, closely correlated to the year of retirement, or expected liquidation date. These funds are normally identified in the title by the parent company/investment firm name, the type of fund (growth, value, etc..), and year. They are also often adjusted on a year-by-year (sometimes quarter-by-quarter) basis. For example, a fund name may resemble the following – Fidelity S&P 500 Retirement 2030, or Schwab Global Value 2035 (not based on an actual funds). Funds can also be broken down into the exact holdings within, the percentage or “weight” of each holding, and average yearly performance.
The general approach of a targeted age or year fund is to reduce the risky portion of the portfolio, and increase the “safety,” based on one’s risk tolerance, as the individual ages and moves closer to retirement. However, depending on one’s own risk tolerance, current financial situation, and potential future earnings, this “cookie-cutter” strategy may not always be the most beneficial approach.
Every individual has their own unique circumstances, of course, based on health, life-style, additional assets, number and age of children, and other aspirations. For instance, an individual who accrued a $1 million portfolio by age 55, is in good health, has owned a home for 30 years, and chooses to retire to open up a whole new home-based business, may have a much different outlook/plan for the future than someone who has $250k for retirement by age 62 ½, has some health problems, no other assets, and just wants to quietly live out their life. The former would likely have a higher risk tolerance as they are on better financial footing, and can withstand some corrections in the market. The latter may not have these same luxuries, and would wish to be safer to ensure preservation of capital, collect income from safer investments, and potentially experience less stress.
Once you reach the time to retire, the landscape also changes. Investment brokerage firms offer many free services, including publicly traded funds, that can be personalized to your own needs, without necessarily paying high fees and commissions. They also offer free online calculators to assist in determining your own formula for withdrawal’s, time frames, and continued investing/income, based on your needs and desires. For those who feel comfortable enough, managing your own portfolio is not as difficult as it seems, with the right guidance. A significant amount of fees and commissions can be saved by avoiding paying for a fund manager to potentially review your portfolio once every 3 months, and make a slight adjustment. Keep in mind that as you approach retirement, although the market always seems to go up over time, it becomes more crucial to be familiar with your investments, as one bad year can delay your plans for several years.
One major overlooked factor of IRA’s and similar accounts is that one can buy and sell within the account with tax deferment. Selling an equity from within the portfolio is allowed, and no asset has to be held indefinitely. It is not the same as selling in a regular brokerage account. Therefore, the percentage of cash vs holdings can be adjusted at any time, without penalty. Investing in short-term CD’s, rather than just “holding” through drawdowns in the market, can sometimes be safer than some dividend paying assets. Become familiar with your portfolio as you age, do not falsely believe that all previously well-performing assets will continue to do so, and review about once a month. Figure out a plan that is best for you in your own personal situation.
Review your options and consider consulting with a financial literacy expert by connecting with a professional on the website www.Becauseyourmoneymatters.com.
For additional discussions and education, please continue to visit our BLOG section here on ASTRO-FIN.com, where we provide periodic updates on a variety of topics.
***As always, this information is not intended to be financial advice, or any specific buy or sell recommendation, but rather a guide to assist the reader in some further understanding of current economic conditions.
