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Investing for Retirement

By WealthTrust Arizona

When they enter the workforce, most young people are consumed with their day-to-day lives and are not thinking about issues with long-term consequences, such as retirement planning. This is unfortunate, because waiting until you are a few years away from retirement is too late to begin planning.

As an example, let us take a young woman who is just starting her first job and is looking for advice on an investment strategy. Two suggestions are to go with a 2050 target-retirement fund, or to divide her money in the following manner: 40% in an S&P 500 index fund, 40% in a small-cap index fund and 20% in an international stock index fund. While both scenarios are worlds better than having no plan at all in place, the first idea – a target-date fund – is probably the preferable option. The appealing feature in choosing target-date funds is their simplicity – a young person chooses a fund with a date which roughly corresponds to  the year they will retire, such as 2050 or 2060, and they get everything they need (domestic stocks, international shares, a diversified portfolio of bonds) all rolled into one fund. This is a great option for those just starting out in the job market or anyone else who does not want to devote the time and effort it takes to build and monitor a retirement portfolio.

While not all target-date funds provide what you need in the same proportion, generally the portfolios have reasonable allocations. For example, most 2050 funds have approximately 90% of their assets in stocks – with around one-third of that stake in foreign shares – with the rest in a diversified group of bonds. As time goes by, that mix automatically gets more conservative, shifting toward bonds.

Of course, no matter what their advantages, target-date funds are not perfect. Some may have higher fees, and some tend to be more aggressive than others (which is more of a risk the closer one gets to retirement age.) Also, do not fall into the common trap of “invest and forget” – make sure you check in to see if your portfolio is still working for you, especially during market downturns (a lesson many investors learned the hard way in 2008, when stock-heavy target funds lost as much as 40% of their value.)

The second option for our young investor – creating her own portfolio – is also a good one. She would have to invest more time and effort into choosing funds, deciding how to allocate money among different asset classes and rebalancing when necessary. Instead of a mix of 100% investment in stocks, our example investor might want to look at having a small share – around 10% – in bonds. Instead of allocating half of her domestic stock portfolio to volatile, small-cap stocks she might want to think about market weighting for small- and mid-cap stocks. Combined, these stocks make up about 30% or so of the overall U.S. stock market.

One last note for our young investor: she should contribute as much as she can afford to her retirement plan, at least enough to take full advantage of any employer match. If you have a family member who is just starting an investment strategy and have questions, please contact us.

DISCLOSURE: WealthTrust Arizona is a fee based investment advisory firm that specializes in integrating portfolio management with estate planning for high net worth individuals and families. Services include portfolio management, estate planning, asset and lifestyle preservation, taxation concerns, access to trust and estate documentation preparation, business succession planning and more. The professionals at WealthTrust -Arizona are frequently sought out by the national media such as The Wall Street Journal, Forbes, New York Times, CNBC, BloombergRadio, and others to share their thoughts on matters that impact our clients.

Given the recent events impacting investors and their financial security, we would welcome the opportunity to provide a second opinion for anyone who would like to have a check-up on their investments, financial plan or estate plan. If you know of anyone who may have a concern with their current advisor or current investment portfolio, we encourage you to share our contact information with those that could benefit from a complimentary review.

Advisory services offered through WealthTrust Arizona, a registered investment advisor. WealthTrust Arizona does not engage in the trust business in the state of Arizona or in any other jurisdiction. Not FDIC insured. Not bank guaranteed. May lose value, including loss of principal. Not insured by any state or federal agency.


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