By Dennis Kagel, Investment Advisor Representative
The answer depends upon a couple of factors. First of all, one must take into consideration their age. Most people who are anywhere from their early 20s to mid-40s are usually several years from retirement. This would justify exposure to investments tied to the market due to the fact that this age group has time on their side. By that I mean that logical thinking tells us that even if the market goes down they have time to recover. Chances are these people are continuing to contribute to their retirement plans during this period of their lives. With a diversified portfolio weighted heavily toward equities and using a dollar-cost averaging approach, an investor in this age range is taking an approach that has stood the test of time.
Our approach to positioning one’s retirement plan in the appropriate place relies heavily on what I call “the five-year rule.” This simply says that if you plan to use the money in your retirement plan in less than five years you have no business being in the market. There just isn’t enough time for your money to recover if the market takes a drastic downturn. I’m continually amazed at the number of people who violate this rule. It seems so obvious to me, I find it hard to believe that most savers and investors wouldn’t handle their retirement accounts in this sensible manner instead of exposing themselves unnecessarily to excessive risk. Take for example the negative effects 2008 had on people’s retirement accounts when the S&P 500 was down more than 37 percent. Losses of 25 percent, 35 percent, and more were very common, which is sad because this can be so easily avoided.
Many financial advisors recommend people stay fully invested in the market regardless of their age or their stage of life. This is a philosophical difference, but I couldn’t disagree more with this advice! I sincerely believe that there are many people who recently suffered great market losses who will not live long enough to see their accounts recover even back to where they were prior to the losses. Even accounts that are adjusted by moving to less risky holdings are still exposed to risk. It may be a little less risk or a different kind of risk, but it’s still risk. A portfolio is comprised of a mix of different stocks, bonds, and mutual funds doesn’t mean risk has been eliminated or controlled to the extent that it should be.
There are safe and secure accounts that protect people’s retirement accounts from market risk altogether. That’s right — there are ways to allow your money to participate in the upward gains of the stock market without any stock market risk! These are relatively new strategies and many people are not aware they even exist. While that statement may be hard to believe, it’s true! Not only does the account owner not lose any money, but there is a minimum guaranteed rate of return. Imagine having your money where it will grow when the market is going up, but when the market is going down your account won’t lose anything.
Retirement is supposed to be a stress-free time, especially financially stress-free. You owe it to yourself to find out everything you can about different retirement plans and choose the approach that is right for you.
Please give Dennis Kagel a call at 309-454-9171 for a no-cost and no-obligation visit. He will be happy to provide you with all the details of what he believes to be the best place to have your retirement account as you approach your pre-retirement years.
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