The Bucket - Investor
The Cheerleader saved $12,000 over 10 years and 40 years later had $135,044. Her ending balance is more than 11 times the amount she saved. Investment earnings give us the opportunity to multiply the savings in our bucket. Our savings and the power of
time in which those savings are invested help us to fill our retirement bucket. But how do we decide which investments to select?
Never fear, most retirement plans these days offer a wide array of investment options from which the vast majority of participants can find a suitable option or options.
In the Cheerleader's example, her investment return was a constant 7% over 40 years. That's not going to happen in the real world. Investment returns in all asset classes will fluctuate over time, so the most important part of investing is to find an
appropriate strategy for your situation.
Saving is the key component to your bucket, but investment returns will have a significant impact on how full it is when you get to retirement.
Glossary of Terms
Five Fundamentals of Investing
Asset Allocation - Diversification - Patience - Discipline - Simplicity
The manner in which a 25-year-old invests for retirement can be very different from that of a 55-year-old. Asset allocation is the mix of stocks versus bonds/money market in an investment portfolio. This mix might change the closer you get to retirement.
The younger you are, the more risk you might be willing to take (higher percentage of stocks). The closer you are to your goal, the less risk you might be willing to take (lower percentage of stocks, higher percentage of bonds and money market).
Grandma warned about putting all of the eggs in one basket. Diversification is the modern term for heeding her warning. By diversifying, you are not relying on one size or style of company or one market sector. By spreading the wealth, you manage the
Have the patience to understand that investing for retirement is a long-term project. Even an investor who is only five years away from retirement should have long-range goals. Good times and bad times are going to happen. An investor who has the discipline
to weather the stormy times, and not get too excited in the good times, will do well over the long haul. You shouldn't monitor your progress every day. You shouldn't have to make changes to your investment strategy every quarter. Keep it simple. Make
your choices and stick to them.
The DIY Investor
You know them, Do It Yourself (DIY) people. Some people are just "handy" when it comes to doing things on their own. Whether it's fixing things around the house or repairing or maintaining the car, they know what needs to be done. And being good at DIY
means you know how to do it without making the problem worse.
Being a DIY retirement plan investor is no different. You need to be able to evaluate your situation and have the proper knowledge and tools to address the situation. Understanding time horizons, risk tolerance, and other sources of retirement income
can help you develop an asset allocation strategy that in all likelihood will change over time. Be properly diversified by choosing asset classes that fit, not just the best performing funds over the last 3 months or 3 years. The most popular oil
filter on the market may not be the best fit for your make of car.
Typically, the DIY'er has reasons they do their own work. It might be reduced cost, or stress relief. More often than not, it's because they like just to do it. With investing, typically cost isn't a difference maker and we can't imagine investing reduces
stress. So is this something you like or want to do?
On the surface, investing in your retirement plan can seem to be a daunting task. We've seen cases where people won't even save in their retirement plan because of the investment decisions they have to make. Most people aren't professional investors by
trade. Most have other jobs that keep them busy throughout the day. The solution is there in most retirement plans: Investment help.
Target Date Funds - A collection of diversified investments that are selected by the fund manager to match an investor's estimated date of retirement. Typically, the fund is more aggressive the further away from the date of the fund and will become more
conservative as the date of the fund approaches.
Managed / Model / Risk Based Portfolios - A collection of investments that are selected by an investment professional to match an investor's risk profile. These portfolios may have names like Aggressive, Moderate, and Conservative. Unlike target date
options, the individual investor will need to change models if they wish to become more conservative (or more aggressive).
Getting money into your bucket isn't enough. You will need to multiply and eventually protect your savings. If you don't want to do it yourself, the solution is investment help and it's there in most retirement plans. If you are not comfortable choosing
your investments, use the investment help available in your plan.