Investment Tips for Retirees, Seniors, and Baby Boomers

How to invest at or near retirement is probably one of the most common questions I get. My answer: it depends. Typically investors begin to shift their retirement portfolio from growth to income as they get closer to retirement. Unfortunately, many have not calculated the necessary rate of return needed to pay for or supplement their desired life style, educated themselves on various investment approaches or truly comprehend their risk tolerance. Failing to address these and other issues will cause unnecessary stress and may eventually lead to other poor decisions. Here are just a few tips to keep in mind when you are considering how to invest.

Find and work with an advisor you trust. This might sound self-serving, but what I have found is that good decision making is done in collaboration with others. They say, “Two heads are better than one.” The key is to find that right advisor in a sea of sharks that fits your needs in a cost affective manner. Look for the following:

• Understand the adviser’s philosophical approach managing risk and return, and ask, in writing, to see his/her track record.

• Check credentials. Is the adviser a Certified Financial Planner (CFP®), Certified Public Accountant (CPA) or Enrolled Agent (EA)? Better yet, is the adviser a fee-only financial planner who doesn’t receive commissions?

• Ask the advisor for Part I and Part II of the Federal Securities Disclosure Form ADV. It contains information about the advisor’s qualifications and discloses any past legal or financial problems.

Know Your Comfort Level for Market Risk

All investments other than a bank account or other cash-equivalent investments will fluctuate in value, some more so than others. When devising an investment plan, honestly evaluate your comfort level with risk. If you will panic at sharp losses, then you probably shouldn’t buy more volatile types of investments, such as some stocks and bonds. The reason is simple: if you lose your nerve when markets take a big drop and consequently sell your investments, you’ll probably do much worse than if you had invested more conservatively in the first place.

Don’t make hasty and uniformed decisions that are made with emotion rather than rational thinking. The field of behavioral finance seeks to explain the set of psychological biases that affect people’s investment decisions. If you can’t bring yourself to sell a loser stock, or if you have picked investments because they felt “safe,” there’s a good chance you’re managing your money with your heart and not your head. Since our biases are aggravated when our brains feel overly excited or afraid-like when the Dow drops 1,000 points-you might find yourself making investment moves that you’ve never considered before, or feeling particularly panicky about your money. I think Warren Buffett said it best: “For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.”

Diversify your investments and develop a plan that ebbs and flows with the market. By that I mean not strategies of market timing nor buy and hold but position yourself somewhere in the middle. Usually, the best long-term plan is to divide your money among several categories of well-researched and thought-out investments. I have found that ETFs (Exchange Traded Funds) offer an excellent array of investment choices at very low costs. My experience has taught me:

1. Over time, some mutual funds may have a difficult time beating their benchmarks, thus not justifying their management fees.

2. Some individual stocks and bonds may have too much risk.

3. Annuity fees and commissions may eat up any real returns.

Focus on asset allocation. Studies have shown that 91% of a portfolio’s performance is determined by allocation of assets, not individual investments or market timing. Wikipedia

• Fixed income and equities. Typically, retirees change their asset allocation to include more fixed income securities than equities. This is a fairly well known strategy. However, what is usually not considered is the actual rate of return that is needed to produce an income stream to maintain your desired lifestyle. If evaluated properly, this consideration will have more influence over the mix of securities than asset allocation or risk tolerance.

• Fees add up. Investment fees come in many forms, including expense ratios on mutual funds, commissions for stock or ETF trades, and account management fees from advisors. Fees should be no more than 1.5% of your total portfolio.

How to invest is an art and no one person or company is correct all the time. I do know one thing for sure: the probability of enjoying a successful retirement is increased if you follow some basic rules and work with a trusted professional.

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