Recommendations for Investors Nearing Retirement
Recommendations for Investors Nearing Retirement
Late savers and older investors who have had big losses in the stock market may be tempted to invest in a few “hot” stocks or mutual funds in an attempt to make up for lost time. This is rarely a good idea, however. People in their late forties through sixties simply don’t have much time to recoup their losses when they are so close to retirement. The trade-off for limiting investments to just a handful of companies or market sectors (e.g., technology) is reduced diversification and a greater potential for loss.
A much safer investment strategy is to diversify and dollar-cost average. Diversification means spreading your money among different investments to reduce the risk of loss from a decline in any one investment. There are several easy ways to diversify investments:
• Place money in several asset classes (e.g., stocks, bonds, cash, and real estate), a strategy known as asset allocation.
• Choose different investments within each asset class (e.g., stock from different industries).
• Purchase investments, such as mutual funds and exchange-traded funds that contain diversified portfolios of stocks or bonds.
• Purchase stock and bond index funds that track broad market indices.
• Purchase an asset allocation fund that includes three asset classes—stock, bonds, and cash.
Dollar-cost averaging is the practice of investing equal amounts of money (e.g., $50) at a regular time interval (e.g., monthly), regardless of whether the value of investments is moving up or down. A common example is the amount that workers contribute to a tax-deferred retirement plan each pay period. Another is monthly deposits that are automatically debited from a bank account and transferred into a mutual fund investment plan.
Dollar-cost averaging reduces average share costs over time. Investors acquire more shares in periods of declining share prices and fewer shares in periods of higher prices. When dollar-cost averaging is practiced over long time periods, time diversification reduces investment risk.
Barbara O’Neill, Rutgers Cooperative Extension, September 2002
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