Retirement Planning and the Financial Professional

What do you do when, according to a recent post by Harriet Brackey of the Sun-Sentinel Tribune, professional advisers gather and one “thinks he can pick outstanding companies and beat the market” while another, “uses many studies to show that no one beats the market for long and so he favors index investments” and another offers an, “in the middle, putting the bulk of his clients’ money into an index-like investment, yet playing around the edges with active stock or bond picking, hoping to goose up the overall return of the portfolio”?

Why does this confusion seem shocking yet at the same time, not so much?

It seems that this group of professionals does not have a unified game plan for their clients for three good reasons.

There is money to made in confusion. If you can keep the theories shifting, the folks who pay for these services believe that they are doing better than their peers - and that brings me to my second point.

We spend far too much time creating benchmarks based on another person's idea of successful investing and retirement planning. Financial planners know this and try to "tailor" your investments accordingly, making them seem so personal.

The guy who suggests his client index should do exactly that. Perhaps a growth index (mid-cap or small-cap) a value index (large-cap) and emerging market and an international index would suit just about every investor's needs. Which makes the financial planner obsolete. Not only will that client save money in fees for the financial planner, they will also be paying less for the funds.

Retirement Planning - A is for Asset Allocation

Today, we begin a look at the alphabet soup that has become investing and more importantly, retirement planning. For most people, the concept of saving is already understood, the downside effects of having debt has been completely drilled in - from every angle imaginable, and the importance of a retirement plan or planning strategy is absolutely necessary to prevent financial disaster when we hit or sixties or seventies.

A is for Asset Allocation

When there is market turmoil, one of the first things you should examine is how well you have allocated the assets in your retirement portfolio. This is no easy task.

If your 401(k) was properly allocated a year ago, before the economy slowed down, with mutual funds that were focused on growing your money and with your risk tolerance in mind, you will be fine. Fundamentally, not that much has changed.

Smart investors know they need to give their portfolios twelve months to fully utilize the plan. History has shown that with time, many of the imbalances that have a stranglehold on the markets will loosen their grip and things will return to normal.

Hold tight, time will come to the rescue.

What is asset allocation?

How those assets are positioned in your retirement portfolio however is a different matter.

In a retirement plan, asset allocation takes on a different meaning. In your portfolio, you should have basket of mutual funds that focus on different parts of the market. This method of investing protects you from swings in the market that is often specific to one group of investments. The markets rarely fail altogether.

The most recent example of this happened in early 2008 when the stocks of banks and other financial institutions began to falter. The most famous was the failure of technology stocks in 2000. Had you not allocated your assets properly, you would have felt a greater loss than the market as a whole did. Asset allocation protects you from this.

The Right Mix

In order for asset allocation to work, you need to determine two things: your age and your risk tolerance. Age is not so much a reference to how old you are but how far off in the distant or near future your retirement is.

Your risk tolerance is a reference to how much of your investments you are willing to put to the test.

If you are in your twenties, it is generally assumed that you should be the most tolerant of risk, investing in growth mutual funds and able to overcome any short-term problems.

Allocation assets becomes much more important once you reach forty, beginning to temper your risk and protect some of your assets. By age sixty, you should be investing a conservative mix of stocks and bonds.

How to get the Right Allocation

Perhaps the simplest way: invest in target funds that save for a future retirement date. These types of funds gradually change your assets over the years, essentially re-allocating for you.