Three Important Retirement Investment Concepts

Three Important Retirement Investment Concepts

There are only three things you need to think about to earn an extra six figures in your retirement plan…

1.  Asset Allocation
2.  Low Fees
3.  Index Funds

Asset allocation means how you divide up your capital among several categories of assets.

By taking a broad view of the possible asset classes to hold, you can meet your retirement goals. Changes in the market get smoothed out by the diversified nature of the portfolio… leaving you to sleep well at night.

The key is doing it from the start and sticking to it.

First, you set aside some cash for emergencies… Then, start with a simple allocation: Decide between stocks and bonds. If you have a longer-term view and a high tolerance for risk, you might make your allocation 80% stocks and 20% bonds. If you are closer to retirement and don’t like volatile returns, you could do 70% bonds and 30% stocks.

As you get closer to retirement, you can adjust your allocation to match your risk tolerance. For example, you can use the “60/40” asset allocation while you are in your 40s, 50s, and 60s… and then start increasing your allocation more to bonds when you reach your 70s.

Hidden fees of your investments

Fees on fund investments are even worse. The fees always look small to the untrained eye. A mutual fund can easily charge 2%-3% of assets without looking too expensive.

When the percentages are that small, it can seem like it’s not worth your time to fret over fees. But that’s completely wrong.

Remember, these aren’t one-time fees. It’s a 2% to 3 % hit every year. Over time, that percentage adds up substantially. And it’s particularly egregious considering you can find funds with fees as low as 1%, or even 0.25%.

Even more troubling, each year you pay a fee, you lose decades of compounding that would grow on top of that money.

 

The cheapest funds are the index funds.

Index funds don’t have a Wall Street trader behind them, trying to outcompete everyone else and beat the market. Rather, index funds follow simple rules designed to help them track the overall performance of a particular asset class, like U.S. stocks or Treasury bonds.

Most “actively managed” funds (those with a manager trying to pick the best stocks) underperform the market year after year. In fact, 96% of actively managed mutual funds fail to beat the market over a sustained period.

You probably could do better if you built your own portfolio based on high quality common stock.

 

Daniel F. Iuculano, AAMS CMFC

Accredited Asset Management Specialist

Chartered Mutual Fund Counselor

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