Today, many Americans are feeling
nervous about opening the envelope
containing their 401(k) or IRA statements. No matter what type of assets you
hold in your 401(k) or IRA, more than
likely they have fallen in value during the
past year. That is why it is important to
allocate your assets in a variety of investment types.
“Many people who were approaching
retirement did not change their asset allocation and, as a result, the performance in
their 401(k) plan was poor,” says Mark F.
Rhein, senior vice president of The
Private Bank at Fifth Third Bank, Tampa
Bay. “They’re now questioning whether
they’ll be able to retire or have to continue working.”
Smart Business learned more from
Rhein about how asset allocation can
lessen investors’ overall portfolio risk.
How does asset allocation help to mitigate
investment risk?
Investing in broad groups, such as
stocks, bonds, commodities and real
estate investment trusts (REITs), may
have lower risk than putting all funds in
one asset type. Generally, one of these
investment types is going up in value or
holding its value, when others may be
going down in value during a business
cycle. That is the basis of diversification.
Investors then trim gains and reinvest the
proceeds periodically to take advantage
of varying price moves for the long-term
betterment of their portfolios.
What should investors remember in this
environment?
We have heard from many clients saying
they have lost sleep because of their
401(k) or IRA accounts. The assets to
help them retire five, 10 or 20 years down
the road are now worth substantially less.
In an attempt to recoup some of the value
of their assets, they reallocate often in
reaction to the markets and hope for the
best. However, that type of ‘trading on
emotion’ is one of the most common mistakes individual investors can make during this time. Investors will try anything
to stop the hemorrhaging in their 401(k)
or IRA. Unfortunately, there is no quick
fix in restoring confidence to financial
markets, which has been eroding over the
past two years. Patience is truly a virtue
during a period of contraction.
They should be asking themselves,
‘What are my long-term goals and objectives? Are they still the same? If they are,
what is happening with the market as it
relates to its impact on my IRA and
401(k)? What does that mean in terms of
how I should change my overall strategy?’
As people get closer to retirement, they
should be looking at their asset allocation
and reducing some of the risk.
What can investors do right now?
Now is the time to go back to the basics
with your 401(k) or IRA account. Given
the stress of the financial market, it is
advisable to take another look at your
overall financial plan and how your
401(k) or IRA fits in to it.
- Step back and look at your time horizon. When do you want to retire? With
your 401(k) or IRA losses, will you have
to add another three, four or five years to that horizon in order for your assets to
rise in value? - Look at your risk tolerance. How
much are you willing to risk? If you are up
at night fretting about how much you have
invested, you are risking too much. Seek
to comfort yourself mentally by incrementally shifting your asset allocation. - Look at your asset allocation ranges.
A conservative rule of thumb is to hold
your age in fixed-income securities. For
example, a 40-year-old should invest 60
percent in equities and 40 percent in fixed
income. Conversely, a 60-year-old should
invest 40 percent in equities and 60 percent in fixed income. This is only a general guideline; a different allocation may
better suit your specific situation. - Have a deliberate rebalancing approach in mind. At Fifth Third Private
Bank, we are finding most people are
falling into two categories: trading just to
trade or not trading at all. Seek to rebalance your portfolio on a semiannual or
annual basis to instill discipline in your
investment decisions and take advantage
of the benefits of diversification.
What else should investors know?
Do not hesitate to ask for advice. A
qualified financial planner/professional
should give individual investors professional, unbiased assistance that will help
them through business and investment
cycles. We believe the next few years will
likely see a reincarnation of the markets
and the financial system, and a wealth
management adviser should be able to
help you make the most of it.
Once again, these financial times are
extremely unique. Being deliberate and
incremental in decisions involving asset
allocation will help individual investors
sleep a little easier during turbulent market conditions.
MARK F. RHEIN is senior vice president of The Private Bank at Fifth Third Bank, Tampa Bay. Reach him at (813) 306-2492 or
[email protected].
