Steps for Proper Investment

6 Steps to Proper Investing

Some people find investment management to be a time-consuming and overwhelming task. For other people it is an enjoyable pasttime. No matter your feelings, these six steps will help you to manage your retirement savings properly and with ease.

1. Evaluate and understand your investor type.

It is critical to be aware of how you would like to interact with your investments. Perhaps it sounds like we’re recommending that you take a personality quiz. That’s not necessary, but you should take time to truly think about your personality and your feelings about investing. Understanding yourself in this regard will help establish the best plan for retirement investing. Most people will fall into one of three investor type groups: 1) enthusiastic investors, 2) help-me-to-help-myself investors and 3) please-just-do-it-for-me investors.

The enthusiastic investor enjoys finance and analysis. This person wants to be fully engaged in the research and decision-making for their investments. They will take time to research investment options, will understand investing terminology and will actively seek people to discuss investment strategy.

The help-me-to-help-myself investor is interested in investing but needs a push in the right direction. This investor type will have a basic investing plan and will want to discuss ideas for confirmation. A help-me-to-help-myself investor might have the drive to be an enthusiast, but he/she lacks the time to devote to the research necessary to get it done right.

Then there are people who would prefer a completely hands-off approach: the please-just-tell-me-what-to-do group. The people who fall into this group have neither the time nor interest in personally handling retirement planning. Please-just-tell-me-what-to-do types will want someone else to make decisions for them.

2. Understand your tolerance for risk.

The word risk often appears in financial discussions, and it can be confusing and intimidating. Regardless of your investor type or the investments you’ve selected for your retirement savings, you are assuming a certain amount of risk.

In terms of investing, risk refers to the chance to lose your investment in exchange for the chance for gains. Generally, the greater the chance of loss, the greater the chance of higher returns. For more information, you can read our Risk Assessment article.

Risk is associated with volatility. More volatile investments experience more significant swings in value during a given time frame, which places investments at higher risk. The key to risk is to understand whether you are a more conservative investor or a more aggressive investor. The more time you have until you will need to use your retirement assets, the more aggressive the investment strategy you can employ. A longer time line means you have more time to endure short-term market volatility, and, if you are comfortable doing it, you can focus on long-term growth. The higher the amount of risk you are willing to assume, the higher the potential reward/return you may experience, and vice versa as you pursue more conservative investments. More aggressive investments have historically been highlighted by periods of volatility that investors with short-term horizons (one-to-five years before needing access to retirement assets) may want to limit or avoid.

3. Determine the right allocation to fit your risk tolerance.

The chart below briefly describes and ranks the level of risk and volatility for several of the most commonly available asset classes in employer-sponsored retirement plans.

Familiarize yourself with the risks associated with different asset classes then determine whether you are conservative, moderate, aggressive – or somewhere in between. Take a look at some sample allocations for conservative and aggressive investors:

 

 

If you would like to know more on this subject, read the Asset Allocation article in the Retirement Basics Education Center.

4. Select funds to fit within your target allocation.

After you’ve determined the right allocation mix for your risk profile, you will need to select the appropriate funds from your investment options – this will likely be the most time-consuming task you face. Using the Asset Class Categories chart from step three, select funds that fit into each category. Mutual funds available to the public (these funds will have a ticker symbol for tracking) will have a prospectus providing necessary information about fund objectives, the management team and fees. You should also review fund style.Morningstar.com is a good resource for fund style information. Funds unavailable to the public still have literature outlining objectives, management and fees – your retirement provider should be able to provide the information.

Research the available funds’ historical performance, management history and associated fees. Look for funds to provide consistent performance rather than a few “hot” investment return situations. Find funds with a stable management team, and avoid funds with too much turnover. Always be aware that higher fund-assessed fees will cut into your return. Weigh all of your available options carefully to choose the most appropriate funds for your allocation.

5. Evaluate how current holdings fit your needs.

Review any existing investments within your employer-sponsored plan to determine whether your investment choices fit with your strategy. You worked hard to research and establish your investment plan, so be sure to apply your blueprint to existing retirement investments.

Also evaluate any assets held outside of your employer-sponsored plan. How do these investments fit into your strategy? Do you have IRAs or other retirement plans through previous employment? How does your strategy fit with that of a spouse or partner?

6. Monitor your investments and reallocate.

Step six is often forgotten, but it is extremely important. Funds will earn returns at various levels over time, causing your allocation to become weighted differently than you intended. Also, funds are often added or removed from your plan options. Quarterly evaluation and reallocation will help keep your portfolio balanced in the appropriate asset classes and ensure you continue to have the most appropriate choices for your situation.

Monitor the historical performance of your funds, but avoid making short-term decisions. Chasing returns is one of the biggest, and most common, investor mistakes. Its costs investors millions each year. Look for funds to perform consistently and within the parameters outlined by the fund prospectus.

Additionally, personal investment needs change over time, and so must your strategy change. Re-evaluate your time-to-retirement, your lifestyle needs, your health-care expense concerns and your changing tolerance for risk. Do not hesitate to alter your asset allocations as your needs change.

Source: http://www.smart401k.com