Do you enjoy choosing investments for your retirement account? Some people really get into it. If you’re not one of them, don’t worry. As long as you understand the investing basics, you have the tools you need to make decisions about your retirement investments.
Pick by Performance?
Investing in funds or portfolios that performed well last year may seem like a good idea. But there’s no guarantee that an investment that just had a great year will be able to repeat its stellar performance. Many things can impact investment performance, such as the state of the economy, consumer confidence levels, interest rates, the underlying companies’ performance, and even domestic and foreign policy issues. Always remember: Past performance is no guarantee of future results.
When choosing a fund or portfolio, look at its long-term record and average annual total return, among other factors. Compare its performance to that of an appropriate benchmark index. If the fund’s returns consistently measure up to an appropriate benchmark over a number of years, it’s a good indication that the fund has a quality manager or management team.
Track a Trend?
Hot investing trends and fads can be very appealing — but they can also be fickle. Just like the latest fashion, an investing trend can be super hot for a period of time . . . and then fade away. Think back to the dot-com boom. Many of the companies that fueled the boom ended up failing. And many of the investors who hopped on the bandwagon ended up with significant losses when the bubble burst. Always remember: In investing, if something seems too good to be true, it probably is.
Keep It Simple!
Rather than chasing trends or hoping that last year’s winners keep “over performing,” stick to the basics. Your plan offers funds or portfolios that represent the major asset classes — stocks, bonds, and cash equivalents. Choose a mix of investments that is appropriate for your risk tolerance, the amount of time you have to invest, and your investment objectives.
When you invest in a mix of different asset classes, you are diversifying* your investments. This helps you manage risk and may help improve your returns. The theory behind diversification is that when one asset class (stocks, for example) loses value, another asset class (such as bonds) may deliver positive returns that can help offset or minimize those losses.
Don’t feel that you have to keep switching your retirement investments around. A simple strategy is often the best: Come up with an asset mix that works for you, contribute regularly, and keep a close eye on your account.
* Diversification does not ensure a profit or protect against loss in a declining market.