After watching the stock market soar to record highs during the first four months of the year, many investors are wondering if they should make changes to their investment portfolios. Perhaps, but not because of what the stock market has done. Investment decisions based on short-term market moves are often short-sighted. A better approach is to stick to a long-term strategy built on proven investment fundamentals, and aligned with your goals and objectives. Here are six simple steps from Thrivent Financial that can help put your financial plan on the right track.
If your employer offers a 401(k) plan, use it. For a variety of reasons, it is often going to be your most attractive investment opportunity. Most employers will match a portion of your contributions, making your effective returns higher. If you contribute $1,000 to your plan, for example, and your employer matches that at 50 cents on the dollar, your contribution is actually worth $1,500. A 401(k) also offers tax advantages on contributions and investment gains. Finally, it puts your contributions on autopilot via systematic payroll deductions. That makes it less likely you'll skip contributions and also lets you take advantage of the powerful benefits of dollar-cost averaging*. Simply put, your regular, fixed-dollar contributions buy more shares when prices are low and fewer when they're high.
Understand your investment horizon. Many people underestimate how long their retirement savings will need to last, which can lead to a host of mistakes. Some invest too conservatively, making it hard for their portfolios to keep pace with inflation. Others draw down their assets too quickly in retirement, boosting the odds that they'll run out of money in old age. The average 65-year-old in good health today can expect to live about 20 more years. Your investment strategy should reflect the possibility that you will not only meet, but perhaps exceed, the life expectancy averages.
Don't underestimate the corrosive effects of inflation - even at low levels. At a rate of just 2 percent, inflation cuts the buying power of a dollar by a third in about 20 years. At 3 percent, it does the job in 14 years. Make sure your portfolio includes some assets, like stocks, that historically have outperformed inflation over long periods of time.
Diversify your investment portfolio but understand that you will need to do more to mitigate longevity risk. Diversification is the simplest and most effective approach to managing investment risk but is ineffective at managing many other threats to your financial security. Longevity risk, for example - the risk of outliving your savings - is best managed by pooling your risk with other investors. One way to do that is with an annuity contract issued by an insurance company. Certain annuity contracts work like old-fashioned pension plans, paying a fixed income for life**. Some include escalation clauses that increase your payout over time to keep pace with inflation. Knowing that you have provided for your basic living expenses with an annuity can provide the reassurance you need to take a long-term perspective on stocks and other growth-oriented investments - the ones your portfolio needs to keep pace with inflation.
When investing in stocks, don't confuse where a company is headquartered with where it earns its money. Many people are looking to capitalize on investments in the fast-growing emerging economies of Asia, Latin America and Eastern Europe. Often, though, emerging-market companies are not fueled by growth in their own economies. Many are mining or other natural resources firms whose results are driven by global commodity prices. Rather than investing directly in emerging markets, a better alternative for many people is to invest in U.S. companies that do business globally. Many of these companies have brands that are household names in emerging markets, and some even earn more overseas than they do in the U.S. In fact, a large share of the profits of the companies in the Standard & Poor's 500 Stock Index is generated outside the U.S. Bottom line, you already enjoy substantial global diversification with U.S. stocks.
Don't be afraid to ask for help. The ever-expanding array of alternative investments can seem overwhelmingly complex and may require frequent and ongoing attention. Rather than trying to do it yourself, consider working with a financial professional. Getting their advice on matters critical to your financial well-being will usually make good fiscal sense.
This column was prepared by Thrivent Financial for your local representatives' use.
Thrivent Financial is represented in the Lincoln/Lyon Co. area by the Ridgestone Team, which includes Greg Nolting and Josh Johnson at 1411 E. College Drive, Marshall, MN 507-532-2559.
*Dollar cost averaging does not ensure a profit, nor does it protect against losses in a declining market. Because dollar cost averaging involves continuous investing, investors should consider their long-term ability to continue to make purchases through periods of low price levels.
**Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.