Investing for retirement is a roller coaster of emotions for many people. Countless studies throughout the years have shown that investors consistently receive a lower rate of return because they make a move to protect their nest egg. Often these moves are made at the worst possible time after losses are realized and right before markets reverse and turn higher. If you are within 10 years of retirement then you should have a game plan for your investments, and that often means taking some risk off the table.
Right now you probably have access to a retirement plan through your employer - such as a 401(k) - and you make contributions every paycheck. By doing this you are taking advantage of Dollar Cost Averaging. To illustrate the power of Dollar Cost Averaging, consider the following example:
Looking at the chart below, you may wish you had invested in the Red Line. Your initial investment was $100 at $12 per share, and at the end, that same stock was worth $17.54 per share. However, as the price went up, your $100 monthly contribution bought fewer and fewer shares.
Now consider the Blue Line. You bought in at the same $12 per share, but the company's stock price went all the way down to $2 before rebounding to $10 per share at the end. The ending share price is still below the initial price, but as the price dropped, your $100 monthly contribution bought more shares. Here are the results:
You were better off riding out the market lows and continuing to make your contributions, because doing so allowed you to accumulate more shares at a lower price. Then, when the market rebounded, you were presented with a nice gain.
If you find that you are concerned about the current investment market, consider the following two scenarios:
If you are nearing retirement, consider splitting your risk. For the funds currently sitting in your account, take some risk off the table. At the same time, take on higher risk for all new contributions going into that account. This allows you to protect your current nest egg while loading up on more shares if the market drops.
If you are not nearing retirement, take comfort in knowing that the market will always fluctuate, but historically has continued to rise over time. With proper planning, this is a storm you can weather.
If you would like to review the amount of risk in your investment account(s) then feel free to use our free risk-assessment system, Riskalyze. This tool will analyze the amount of risk you are currently taking and compare that to the amount of risk you would be comfortable taking. Click the link below to walk through a short questionnaire.