For many people, investing can be confusing and intimidating.
A few bad decisions and your retirement fund can be blown out of the water. Most people don’t have a lot of opportunities to learn about investing, and are hesitant to talk about financial matters. Some people even avoid investing altogether from fear of losing their money. But there are many ways to invest that make it possible to mitigate risk while increasing returns.
When thinking about investing, people are subject to two emotions – fear and greed. When investors compete to buy scarce resources, prices rise and greed takes the wheel. When fear of uncertainty over future outcomes gains the upper hand, people flee the market or stop investing entirely. This causes markets to plummet. This all-or-nothing kind of thinking makes Wall Street feel like a casino to many ordinary people.
But investing is not about winning or losing big. It’s about winning small, winning medium. With this type of viewpoint, investors can focus on building a portfolio with risk in an acceptable range. This minimizes the chances that the investor will panic and go to cash. When investors are motivated by fear and exit the market, they are reducing the probability of meeting their retirement objectives.
The first job for a financial advisor is to evaluate a client’s risk tolerance. Risk and return are directly proportional. A portfolio’s volatility can be measured using standard deviation, which is a measure of dispersion of a set of data points from the mean. A volatile stock will have a high standard deviation, while a stable stock will have a low standard deviation.
Retirement investors need to divorce decision-making from emotion. Retirement investments are long-term investments, and short-term market fluctuations should have no impact on long-term decisions.
It can help to categorize investments as short-term (0-2 years), medium-term (2-10 years) and long-term (10 or more years). Short-term investments should be kept in interest-bearing accounts that don’t fluctuate with the market, since these are funds that need to be kept readily available. With medium-term investment, it’s possible to take more risk. These assets should be invested with the mindset that they are unavailable. The long-term assets should be invested most aggressively since the horizon will allow for more growth even taking down periods into account.
Most important, though, is the knowledge that it’s not necessary to go it alone with retirement investing. Investors who don’t have the energy or inclination to be significantly involved, or can’t keep emotions out of their decision-making can hire a professional to keep their retirement investments on track.
In choosing an investor, it’s important to consider their credentials and input from those who refer them to you. But it’s also crucial that you feel comfortable with your advisor, and can speak to them freely. Retirement investing need not feel like a spin of the roulette wheel. Working with an advisor can help reduce your stress while helping you achieve better results than you might on your own.
For more information, please read:
Having a retirement portfolio should be a relief, not a burden | Life Health Pro