As most people near retirement, the level of risk they are comfortable with is likely to change. Rather than aggressively investing, some people may consider adjusting their portfolios toward a more conservative investing approach. This could help protect your principal account balances while still leaving room for some gains.
With the varied advice and options available, here are the top three tips on how to adjust your portfolio before retirement and ensure your finances are well-positioned regardless of which direction the financial markets take this year.
Evaluate Your Current Strategy
In recent years, target-date funds have grown in popularity. These funds provide a hands-off approach by adjusting the allocation of stocks, bonds, and cash to get the most out of your investment while automatically minimizing your risk as you get older.
As with most things in life, there’s no such thing as “set it and forget it” when it comes to your retirement portfolio. The cookie-cutter strategy in your target-date portfolio may not accurately reflect a balance of risk and reward.
Even if you’ve previously invested in a target-date retirement fund, you’ll still want to know your options. It’s always best to evaluate your approach to avoid being vulnerable to more substantial declines than you’re ready to handle. Furthermore, this kind of self-assessment could prevent a stagnant portfolio as you live out your retirement years.
Balance Risk with Growth
Throughout 2017, stocks in the U.S. doubled the historical average, gaining nearly 22%. Over the last decade, since the market hit its lowest in the wake of the financial crisis of 2009, equities have increased 15% annually.
With this kind of growth, it’s easy to see that stocks are the best way to ensure your portfolio grows with the rate of inflation and continues to support your retirement spending.
Though this upward trend isn’t likely to continue indefinitely, stocks should always make up a portion of your portfolio. Just how much of your investment is kept in stocks as you near your retirement age is a personal choice that largely depends on your tolerance for risk.
As you’ve pooled your money into different retirement investments over the years, you’ll also withdraw the money you’ve invested over a period of years, too. Considering when you’ll need access to your retirement funds will determine how you should allocate your assets.
If you’re looking to use a certain amount of money in the next year, it might be best left in cash. Using a money market or savings account won’t bring in much growth, but you don’t want the down payment for your vacation home to dry up if the stock market goes south.
Conservative investments such as Treasuries, certificates of deposit (CDs), or bonds are a good choice if you want access to your money in the next five to seven years. Your local bank probably doesn’t have many higher-yield options so shopping around for the best rates will maximize this short-term investment.
Beyond seven years, the stock market is an excellent option for the bulk of your retirement portfolio. Even though no one knows what stocks will do, the continued growth over the past ten years has brought the best returns on average compared to bonds and Treasury bills.
While you can’t completely eliminate uncertainty from investing, you can take these proactive steps to put yourself in a better position and allow your retirement portfolio to flourish over the long term.
Aja McClanahan is a freelance writer and owner of www.principlesofincrease.com.