Risk is one of those unavoidable things in investing. There are two broadly defined investor types. There are some investors who focus almost exclusively on returns and how fast they can grow their money. This type of investor is always finding ways to protect herself against the inevitability of a market correction or a bear market by using risk management strategies. For those who focus on risk, there are risk investment strategies that may be very helpful.
- One strategy to help you manage risk is to reevaluate your portfolio diversification and asset allocation. To further diversify, investors may want to think beyond stocks and bonds.1
- Another risk management strategy is known as rebalancing. The process of rebalancing is to keep a portfolio well-diversified. You see, over time, different assets have different returns or losses. This might mean that you let go of those investments that have appreciated in value while buying investments that are declining in value.
- Another risk investment strategy is to invest consistently. In other words, don’t over react if your investment is declining. If you are in this for the long-term, US Stock Markets can rise and decline over time so it’s important to understand your investment time horizon.
- You can also get an investment risk analysis. This is also known as your risk profile. Investors are generally classified as aggressive, moderate, or conservative investors. You need to know which type of investor you are.
Investment management refers to the management of investments offered by financial professionals and other financial institutions such as investment banks and university endowments. The goal of asset management is to increase a client’s assets over time while managing risk. Asset management utilizes both fundamental and technical analysis. Asset managers may use fundamental analysis to study anything that can impact an asset’s value. For example, any economic or political news can have an impact on the value of a security or asset. Technical analysis, on the other hand, relies on previous price and volume. In other words, asset managers may look at historical date, along with mathematical patterns, known as technical indicators, to fine tune their investment entry and exit points.
Before I offer specific retirement advice, let me repeat a mantra that I tell all my clients: The earlier you prepare for retirement, the better off you will be. Retirement often creeps up on us and we become philosophical by saying, “where did all the years ago.” Below are some concrete steps that in my opinion can help you plan for retirement:
- Monitor your investments prior to retirement and avoid overspending.
- You need to account for inflation as an inevitable fact of life. When planning for retirement, it’s advisable to plan for inflation as part of your strategy.
- While this is not an easy conversation to have, you need to talk with your spouse or significant other about retirement spending. During pre-retirement, it is critical that you both cut out any unnecessary spending.
- Not everything about retirement planning is about money. You need to focus on your physical health. As we get older, our physical health declines, which increases health costs. If you want to avoid sudden health costs that can potentially undermine your retirement planning, make sure you take care of your health.
- Create a budget and stick with it.
- Most importantly is that you need to sit down with a qualified and experienced professional advisor who will help you become fiscally healthy.
- Watch travel expenses during retirement. Many people dream of traveling when they retire, but that only eats away at your retirement goals. It is best to do much of your travelling prior to retirement.
- If you can work longer, you will increase your chances of having a more comfortable retirement. For example, people who retire at 70 years will get a larger Social security check than those who retire at age 66. That’s extra money for life in your pocket.
Retirement Investment Strategy
Regardless of your investment strategy, the goal is to find the right balance between investment risk and return on investment. Below are some of the retirement investment strategies that, in my opinion, you can use to prepare for your retirement. No investment strategy can guarantee a profit or protect against loss.
- You should consider contributing the maximum allowable amount to your 401(k). If you have an employer-sponsored retirement plan, you should take advantage and contribute as much as you can up to the company match.
- Consider opening an IRA or Roth IRA. If your company does not offer a 401(k) plan, you can always open an individual retirement account through a bank or brokerage firm. IRAs offer many of the same benefits as a 401(k) plan, including tax deductible contributions and tax-free growth.
- You should always be mindful of your risk tolerance and asset allocation. You see, risk tolerance is connected to asset allocation. Let’s say you have a lower risk tolerance. In this case, you may want to lower your allocation in stocks, as they tend to be risky.
- Be aware of retirement fund fees. If you are having a qualified financial planner manage your investments, make sure you understand the fee structure. Some planners charge a percentage of your overall investment, while others may charge you a flat fee.
Multi-asset investment strategy
- Multi-asset investment strategies have become popular over the past several years. A multi-asset strategy utilizes alternative investments, which are different from the traditional asset classes of stocks, bonds, and cash. Some of these alternative asset classes include real estate, hedge funds, business development corporations, ETFs, annuities, and others. No investment strategy can guarantee a profit or protect against loss.
- The main benefit of a multi-asset class model is that it potentially helps manage risk much more effectively than the 60/40 portfolio.
- You see, the 60/40 operates on the principle of negative correlation. In other words, if stock prices went down, bond prices should move up to hedge against risk. It is important to understand that, “for the past three months, they’ve [stocks and bonds] registered the strongest positive correlation this century.”2
- In contrast, my REALM model utilizes alternative assets that are either not correlated to the stock market, or have low to moderate correlation. This could result in potentially better risk management.
- Another benefit of The REALM® Model is its flexibility and customizability. It is flexible in the sense that I can add other alternative assets once they become available to my clients. It is customizable in the sense that I do not use a “one size fits all” approach.
The REALM strategy contains Alternative Investments which are speculative by nature and have various risks including possible lack of liquidity, lack of control, changes in business conditions and devaluation based on the investment, the economy and or regulatory changes. As a result, the values of alternative investments do fluctuate resulting in the value at sale being more or less than the original price paid if a liquid market for the securities is found. Alternative investments are not appropriate for all investors. No investment process is free of risk, no strategy or risk management technique can guarantee returns or eliminate risk in any market environment. There is no guarantee that this investment model/process will be profitable. Diversification does not guarantee profit nor is it guaranteed to prevent losses.
How to prepare for retirement
- One rule of thumb is that the earlier you prepare for retirement, the more comfortable you could be during retirement.
- Start saving at an early age, keep saving, and stick to your goals.
- Get to know your retirement needs.
- Some experts maintain that you will need 70 to 90 percent of your preretirement income to maintain your standard of living when you stop working,
- Contribute to your employer’s retirement savings plan such as a 40(k) plan.
- Learn about your employer’s pension plan. Make sure you are covered by the plan and understand how it works.
- Learn about how your pension is being invested.
- Most importantly is that you understand the ramifications of early withdrawal from your retirement savings.
1 SoFi Learn, “6 Investment Risk Management Strategies,” sofi.com, September 10, 2020. https://www.sofi.com/learn/content/investment-risk-management/
2 Bloomberg News, “Latest Blow to 60/40 Model is Exodus of Mom and Pop Investors,” investmentnews.com, June 23, 2021. https://www.investmentnews.com/latest-blow-to-60-40-model-is-exodus-of-mom-and-pop-investors-208070