Financial investment is a risk that offers no guarantee of success. Even the most experienced financial professionals miss from time to time and are forced to adjust their thinking in response to an unexpected development in the stock or bond markets, says Adam R. Lulow, a Retirement Benefits Specialist at The DMG Group.
“The truth is we don’t know what’s going to happen,” Lulow says. “We can make assumptions and we can put a plan in place, but the first thing we tell investors is that something is going to change with that plan.”
The fear of the unknown can drive some people to avoid making any investments, which can make it very difficult to accumulate enough money to fund your retirement.
“The most important thing is that you start saving,” Lulow says. “You can change your investments inside a plan. But if you don’t have enough money to retire, the only solution is to work longer.”
Smart Business spoke with Lulow about the importance of diversity when building out your retirement plans.
What are the most important things to keep in mind when trying to diversify your investment portfolio?
There are numerous risks and rewards when investing, and each asset class reacts to economic events differently. If you select from multiple asset classes, you can help minimize the risk and the volatility in your portfolio. If you own a stock, it is usually going to come with a much greater risk than a bond portfolio. But as the company does better, your stock price rises and you have a greater return on your investment.
Conversely, a bond is going to have lower downside risk, but also a lower growth ceiling. The reward of a bond is usually going to be much lower than the reward of a stock.
Ideally, you want a mix of both types of investments to spread out your risk and keep adding to your retirement savings. Early on, you can be more aggressive and look at stocks that offer the potential of a higher return. The risk is greater, but you have more time to make up any losses. As you get closer to retirement, bonds become more attractive since they are less prone to those steep declines.
Why is rebalancing your portfolio so important?
If you have a portfolio that is 60 percent stocks and 40 percent bonds and the market is going down, you may feel pressure to sell. What you should be doing is taking some of your cash or some of those bonds and buying the market while it’s down. The opposite is also true. As the market goes up, you may think now is the time to buy, when most likely, you’ve already missed the ideal time to buy. That is why being disciplined about rebalancing your portfolio on a regular basis is so important. It gives you a more reliable and objective plan with which to build your wealth.
If the market is up and your portfolio is 65 percent stocks, 35 percent cash or bonds, you may want to rebalance back to that 60 percent stock/40 percent bond mix. You take that 5 percent of growth in the stocks and move it into the bond or cash equivalent to lock in the gain. On the other side, if the market takes a drop and you’re now 55 percent stocks/45 percent bonds, you may want to take that 5 percent of the bonds or cash equivalents and move it over to stocks or mutual funds and buy when the market is low to take advantage of the potential market rebound.
What are some tips for selecting the right stocks to make an investment?
There are large cap stocks, which are going to be your large, well-established blue chip companies in the United States, and then small and midsized companies. Those well-established companies could lead to more stability, while the small and mids take a little more risk. But it’s a good way to diversify. Everyone is going to be different, which is why it’s a good idea to contact a financial professional who can help you make a more informed decision.
Investments in stocks, bonds, mutual funds, and variable annuities are not FDIC-insured and are subject to fluctuation in value and market risk, including loss of principal. Adam R. Lulow is a registered representative who offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC, and an agent who offers the annuity and life insurance products of AXA Equitable Life Insurance Company (AXA Equitable) (NY, NY) and those of affiliated and unaffiliated carriers through AXA Network, LLC. AXA Advisors, AXA Equitable and AXA Network are affiliated companies and do not provide tax or legal advice. The DMG Group is not owned or operated by AXA Advisors or its affiliates. AGE-118019 (8/16)(Exp. 8/18)
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