There seems to be no shortage of good or bad news related to finances and the economy, and sometimes both can be found all in the same day.
Managing investment portfolios by using news headlines as a guide can create some real headaches these days, as no one seems to be certain whether the economy is teetering on severe recession or just temporarily slowing. Those headaches can reach migraine proportions for individuals approaching retirement.
Heading into retirement
There are several steps that can be taken in an effort to shore up investments as retirement nears. Specifically, for those who are planning to leave the work force in the next 18 to 24 months, there are several important steps to keep in mind:
• Understand the timeline. A person's "time horizon" may be longer than is realized. Life expectancy is also a big factor. A retirement date is an initial benchmark, but individuals need to keep in mind that their money can still "work for them" after they stop working.
• Consider working until things recover. Since 1942, the average bear market has lasted around 10 months, with some longer and others shorter. If the assumption is that the current decline began in October 2007, then it already has passed the 10-month mark. If the start of a person's retirement coincides with a market downturn, taking maximum distributions from a retirement portfolio can substantially reduce the probability that the assets will last throughout the person's lifetime. Therefore, it's important to at least think about securing a part-time job.
• Make sure to have a cash reserve. Build up a reserve large enough to cover six to 12 months of retirement expenses. This can buy time for the market to recover. Note, too, that it also is wise to give strong consideration to selling long-term investments to raise this cash.
Several years to go
For those with more than two years until retirement, there may be time to take advantage of the old adage, "the trend is your friend." Markets may go down, but they also go up. Plan for that eventuality in three ways:
• Increase contributions to retirement savings. Use any extra cash to take advantage of these market dips. Consistent dollar-cost averaging eases the stress in trying to time the market. Individuals also may want to direct some of those extra contributions into a cash reserve, just in case this decline lasts longer than expected.
• Diversify, diversify, diversify. It's no secret. Throughout market cycles, different classes, styles and assets with diverse market capitalizations perform differently. Actively managing portfolio diversification can have a greater impact on performance than individual issue selection.
• Make small, gradual changes to asset allocation. Jumping in and out of asset classes can magnify mistakes and put a portfolio into reactive mode. Moving small amounts of money (about 5 percent at a time) allows people to take advantage of trends without betting the farm.
Slow down
Flexibility and patience are virtues in the world of portfolio management.
Don't fall in love with a retirement date, and don't be frustrated by day-to-day market swings.
Above all, if an individual has questions or concerns, it is advantageous to seek the advice of an experienced professional.
Professional advisers may not be able to provide everyone with the news they want to hear, but they can help maximize and leverage the assets individuals have against their personal timelines and goals - which is much more strategic than basing decisions on the latest market or news announcements.[[In-content Ad]]
Steve Hutchinson is a senior vice president and portfolio manager for UMB's Investment and Wealth Management division in Springfield. He may be reached at stephen.hutchinson@umb.com.
