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Unit 10: Retirement Planning-II

It isn’t practical to discuss in detail the wide array of securities and investing strategies available Notes
in the market today, but we will go over the basics you’ll need to know to set up your retirement
investments.
If you feel you need assistance understanding and selecting securities to invest in, consider
seeking the help of a professional financial planner.

Notes The assets you choose to invest in will vary depending on several factors, primarily
your risk tolerance and investment time horizon. The two factors work hand in hand. The
more years you have left until retirement, the higher your risk tolerance.
If you have a longer-term time horizon, say 30 years or more until retirement, investing all of
your savings into common stocks is probably a reasonable idea. If you are nearing your retirement
age and only have a few years left, however, you probably don’t want all of your funds invested
in the stock market. A downturn in the market a year before you are all set to cash out could put
a serious damper on your retirement hopes. As you get closer to retirement, your risk tolerance
usually decreases; therefore, it makes sense to perform frequent reassessments of your portfolio
and make any necessary changes to your asset allocation.
Generally speaking, if you have a limited time horizon, you should stick with large-cap, blue
chip stocks, dividend-paying stocks, high-quality bonds, or even virtually risk-free short-term
Treasury bills, also called T-bills.
That said, even if you have a long-term time horizon, owning a portfolio of risky growth stocks
is not an ideal scenario if you’re not able to handle the ups and downs of the stock market. Some
people have no problem picking up the morning paper to find out their stock has tanked 10 or
20% since last night, but many others do. The key is to find out what level of risk and volatility
you are willing to handle and allocate your assets accordingly.
Of course, personal preferences are second to the financial realities of your investment plan. If
you are getting into the retirement game late, or are saving a large portion of your monthly
income just to build a modest retirement fund, you probably don’t want to be betting your
savings on high-risk stocks. On the other hand, if you have a substantial company pension plan
waiting in the wings, maybe you can afford to take on a bit more investment risk than you
otherwise would, since substantial investment losses won’t derail your retirement.
As you progress toward retirement and eventually reach it, your asset allocation needs will
change. The closer you get to retirement, the less tolerance you’ll have for risk and the more
concerned you’ll become about keeping your principal safe.
Once you ultimately reach retirement, you’ll need to shift your asset allocation away from
growth securities and toward income-generating securities, such as dividend-paying stocks,
high-quality bonds and T-bills.

10.2.2 Importance of Diversification

There are countless investment books that have been written on the virtues of diversification,
how to best achieve it and even ways in which it can hinder your returns.
Diversification can be summed in one phrase: Don’t put all of your eggs in one basket. It’s really
that simple.

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