Retirement planning is about understanding your retirement goals and the retirement strategies needed to get you there. Conventional retirement wisdom suggests that individuals should hold a well-diversified portfolio of stocks, bonds, and cash that grows proportionally as one ages.
The old adage for allocating funds between stocks and bonds holds that you should keep a percentage of stocks equal to 100 minus your age. If you are 35, a conventional financial planner would tell you to put 65% in stocks and 35% in bonds. If you are 60, they would tell you to put 40% in stocks and 60% in bonds. Or looked at another way, the allocated bond percentage is equal to your age…the remainder is in stocks.
Younger investors have the luxury of time on their side and can afford to have a larger percentage of their investments in high-risk/high-yield equities. The older you get, the better it is to have an increasingly large percentage of your retirement income in low-risk/low-yield investments.
That said, high-yield investments are not for everyone. Keep in mind, when you are looking for high-yield investments, such as penny stocks, your risk will be much more significant than with conservative investments, such as government bonds. But then again, a basic rule of investing is that high risk translates into high reward.
Where can investors looking to build their retirement nest egg turn to increase their income and decrease risk?
Whether you’re high risk or risk-averse, one of the most common investment strategies is to focus on income-generating investments. This is easy to manage, as investors spend only the income (dividend yields, interest) that a portfolio generates.
If you want to generate additional income from your investment strategies, you may want to streamline your portfolio and increase the bond allocation to higher yield bonds, or change your stocks to higher-dividend equities.
Regardless of age and where you’re at with your retirement savings, there are investment strategies to suite your risk level and long-term needs. Some investors prefer to maximize expected returns by investing in risky assets, others prefer to minimize risk, but most look for a strategy somewhere in between.
That’s why it’s important to look for investment strategies that allow you to take advantage of long-term growth on the stock market; while hedging against downturns with high-yield bonds and equity funds.
There’s always something investors are worried about. Recently, we heard about the U.S. government reaching the debt limit, shutting down, and inching close to defaulting on its debt. Investors reacted, and the key stock indices started to slide lower due to concern over what could happen.
Now, with a deal being struck to extend the debt ceiling and budget deadlines, those worries are over, meaning U.S. creditors will get their interest payments and the government will go on operating as usual.
This all brings one very critical question to mind: how can investors save their portfolio from situations like these?
In situations where investors are unsure about what will happen to their portfolio, they can follow these three simple investment strategies. These strategies can help investors not only rationally decide on what to do with their portfolio; but they may even find an investment opportunity as a result.
1. Assess the Situation
Take the recent debt ceiling issue, for example. There were concerns that Congress wouldn’t come to a consensus and the U.S. government would have to tell its creditors that they can’t pay them, causing bond prices to decline and portfolios heavy on bonds to suffer massive losses. But what a lot of investors forgot was that the U.S. economy has gone through similar acts many times before, having passed the debt ceiling 78 times.
The lesson here is that investors need to see whether or not the event/situation they are worried about is going to affect their portfolio in the long run. If it doesn’t—and historically, it hasn’t made much of an impact—they should just wait and see … Read More
Over the Labor Day weekend, I met up with my old friend, Mr. Speculator. As always, we had a debate about portfolio management. We had a long conversation about what really is the right way to manage your investments—and, for that matter, if there is any. Should investors invest 40% of their portfolio in bonds and 60% in stocks? Should it be the opposite? Or is there another possible combination?
He said, “Moe, I am a firm believer in going for the fences every time for now, but do you really think I will continue to have the same approach in the long run?” (Turns out, there’s actually a rational investor in Mr. Speculator.)
“The answer is very simple: no,” he added. “When it comes to portfolio management, investors really need to realize there isn’t really a one-size-fits-all approach. I take risks now because I can afford to, but for those who are close to retirement, this is certainly not the way.”
I disagree with Mr. Speculator on many aspects of portfolio management, but on this, I can’t help but agree. Portfolio management differs from one person to another, and the amount of risk an investor should take also operates the same way.
A person who is 50 years old and has accumulated a significant amount of funds in their retirement account should not be taking the same risk as a person who is in their late twenties.
A person who has saved money for their retirement and are closing in on their golden years should be conservative with their investments. They should have more of a focus on assets … Read More
Not too long ago, the per-barrel price of oil was hovering close to $85.00. Now, a few months later, it trades above $107.00; this is an increase of roughly 25% in a fairly short period of time.
One may ask why this matters, and what it means for the overall U.S. economy.
At the most basic level, the price of oil has a very deep impact on consumer spending, which makes up 70% of the gross domestic product (GDP) of the U.S. economy. It impacts consumers in two ways.
First, let this be clear: while the average American Joe doesn’t use crude oil in raw form, he does use it in the form of gasoline in his car. Oil and gasoline prices have a direct relationship; together, they shrink the size of consumers’ pockets. When oil prices increase, consumers end up spending more at the pump and less on goods they want to buy. Note the black line in the chart below: it shows gasoline prices per gallon, and their movement along with oil prices.Take a look at the chart below to get a better idea about surging oil prices:
Chart courtesy of www.StockCharts.com
Second, when oil prices increase, they cause the transportation costs to go higher as well. Eventually, the increased costs are transferred to customers; this makes goods and services more expensive, and their dollar buys less than what it did before.
So how can investors profit from increasing oil prices?
When oil prices go up, different sectors react in different manners. This means some are highly affected, while others, not so much.
Consider the airline industry: what … Read More
When it comes to investing, everyone wants to be in the best performing asset classes. Unfortunately, few, if any, are that good at consistently choosing the top performing asset classes to add to their retirement fund year after year. That’s why diversification is so important.
Riskier investments like stocks provide the best returns over the long term; they also happen to be the most volatile asset. Bonds, on the other hand, are much safer, and, as a result, offer very little when it comes to returns. By combing different types of investment strategies among different asset classes, investors can generate profit and reduce risk levels to meet their retirement goals.
To help minimize the risk of human error, emotions, and uncontrollable outside factors and to maximize long-term performance, investors concentrate on asset allocation—the art of spreading out their money in stocks, bonds, commodities, cash, and, for some, real estate.
The old asset allocation equation used to suggest people keep a percentage of bonds equal to their age in their retirement fund, with the remainder in stocks; a 40-year-old, for example, would park 40% of their investments in bonds and 60% in stocks. But since no two people have the same financial needs, it’s pretty hard to have an asset allocation strategy that works for everyone. The fact of the matter is that it’s up to each individual to find an asset allocation risk level that meets their long-term portfolio needs.
That can be difficult to do in this climate. In spite of weak economic news and high unemployment, the S&P 500 and Dow Jones Industrial Average are hitting new highs. … Read More
A few days ago, I went out for lunch with a friend whom I haven’t seen in a while. He is an active investor who manages his own portfolio. In the past few years, he has done very well for himself, to say the least; the returns on his portfolio have been amazing, and much better than what the key stock indices have provided. This intrigued me, so I asked him how he was able to do all of this in a fairly short period of time.
His response was very short and simple. “You see,” he said, “while many investors look for the ‘ten baggers’ or ‘home runs’ and get emotionally attached to their position, I focus on an approach that’s the complete opposite.”
“What I have seen in my experiences in the past, and I see it very often, is that investors have expectations beyond reality,” he explained. “They want the highest return in the shortest period of time by risking a lot. You have to be very lucky to see robust portfolio growth over time with these types of investment strategies.”
With this strategy in mind, here are three crucial steps investors should follow to grow their portfolio.
1. Be on the Lookout and Act Accordingly
Investment opportunities are present all the time, no matter what kind of market it may be. Be it a bull market, bear market, or range-bound market, investors need to know what kind of investment strategies to use. Bringing back my friend’s example, he knew the direction the markets were following was to the upside, so he traded his way through in … Read More