Managing retirement investments starts with knowing your risk
- By Milt x_Zall
- Feb 10, 2000
Virtually all investments come with some amount of risk attached. It's important to know what those risks are before you decide how you want to invest money for retirement.
Investing for retirement outside of the Thrift Savings Plan (TSP), which is the government's 401(k)-type program, can be a tricky business.
On the one hand, you want your investment to appreciate substantially so you will have adequate income to live comfortably once you retire. On the other hand, you do not want to see all of your retirement dollars go down the drain. That means you must strike an acceptable balance between risk and reward. Investments that offer the greatest potential for significant gains are often the riskiest. Unless you deposit your retirement money in a federally insured bank account, you are going to encounter risk. To contain your investment risk within tolerable limits while remaining fully invested is a challenge.
There are a number of techniques you can employ to manage your investment risk. However, before you can employ these techniques, you must first fully understand the risks your investment portfolio is exposed to.
The ups and downs of the stock market are unpredictable. One approach is to wait until you think the time is right to invest your money. While you're waiting, you can "park" your money in something "safe,"such as a money market fund or guaranteed investment contract. But then you would have to be able to "time the market"— know in advance when the market will go up or down. Not even stock market professionals can do that consistently.
Modern medical technology is adding years to our lives, so it's extremely important to make sure that you are able to maintain your present standard of living during your retirement years. Retirement experts say that you need about 80 percent of your pre-retirement income to live on when you retire. It would be nice if a dollar would buy the same amount of goods and services 30 years from now as it does today but unfortunately, history tells us that that is unlikely to happen. Even a modest rate of inflation, say 3 percent, will cut the buying power of a dollar in half over a 24-year period. In order to enjoy a comfortable retirement, your retirement investments must generate sufficient income to outpace the rate of inflation.
Purchase price risk
You can never be sure whether the price you pay for a stock or mutual fund is going to go up or down within the near term. Price fluctuations are unavoidable. Over time though, the trend should be up if your investment decisions are sound.
Company/industry performance risk
Some companies and/or industries perform exceedingly well for a period of time and then suffer a reversal of fortune. This can be due to a variety of reasons including competitive factors, technological changes, the effects of inflation, the business cycle and foreign competition. The companies/industries you invest in must face these risks and surmount them in order for you to achieve your investment goals.
— Zall is a free-lance writer based in Silver Spring, Md., who specializes in taxes, investments and business issues. He is a Certified Internal Auditor and a Registered Investment Advisor. He can be reached via e-mail at [email protected]