Key Points
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In planning for retirement, some investors might be tempted to make aggressive moves.
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However, it’s best to remember that the higher the reward, the higher the risk.
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Experts recommend approaching your retirement account in a balanced manner.
As the S&P 500 hums along, it’s easy to believe that the stock market is incapable of going in any direction but up. However, invest long enough and you’ll know what it’s like to watch your portfolio take a hit when a bear market kicks in.
A bear market is described as a period in which the value of a broad market index (like the S&P 500) drops by 20% or more. Bear markets don’t tend to occur as often as bull markets and don’t last as long, but that doesn’t mean they don’t happen. And when they do, the best way to protect your money is by diversifying your portfolio.
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That means including a variety of asset classes and securities that reduce risk. As you plan for retirement, spreading investments out among different categories — like stocks, bonds, cash, and real estate — can minimize the impact on your portfolio if one of those categories performs poorly. If your mom warned you not to “put all your eggs in one basket,” she wasn’t wrong, especially if she happened to be talking about investing.
Still, as we move toward the end of the year and the market continues to grow, it can be tempting to convince yourself that the market will never slow. In fact, you may be banking on it by investing as aggressively as you dare, taking a chance on high-risk but high-reward investments.
While high-risk investments may be appropriate in your portfolio, here are six signs indicating that you may want to consider reining them back a bit.
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1. Significant swings in value (high volatility)
Usually, when portfolio values rise and fall, it’s simply a result of the market cycle; there’s nothing to see and little to worry about. However, if your account value fluctuates dramatically, it could be because you’re heavily invested in high-risk assets. Excessive swings in either direction could be troubling, particularly as you approach retirement.
2. Low bond allocation
If you routinely avoid bonds because they strike you as boring and don’t grow at the same rate as other asset classes, you may have a balance issue. Yes, holding bonds can be a real snoozefest, but they typically provide stability and income. And just as importantly, bonds can help balance the risks associated with other, more volatile investments. If you avoid bonds at all costs, you may want to ensure it’s not because your portfolio is out of whack.
3. Concentration on high-risk assets
There’s certainly nothing boring about high-risk assets. After all, when the value of a high-risk asset increases, it can be exhilarating. However, that same asset might fall apart like a tower of wooden blocks, leaving you anxious and frustrated. Knowing that your portfolio also contains less-risky assets is a good way to say, “C’est la vie.”
4. Frequent trading
Even if you love the thrill of the hunt, if you find yourself buying and selling investments often, it may be due to an aggressive strategy that’s not suitable for long-term retirement planning or your personal investment goals. Another downside? Frequent trading can lead to higher transaction costs and tax implications.
5. High expense ratios
If you find yourself paying more in fees, it may be because higher-yield securities sometimes have higher expense ratios due to the additional research and monitoring required. While it may not feel as though you’re breaking the bank right now, high fees can significantly erode your investment gains over time.
6. Increased stress
Let’s face it, there are plenty of stressors in life. However, if you find yourself worrying about your investments or sweating over market changes, it could indicate that your current investment strategy isn’t working for you. Meeting with an experienced financial advisor can help you determine the right balance for your portfolio and offer you some peace of mind.
If you’re hot on investing because you don’t want to depend solely on Social Security in retirement, that’s wise. Ensuring you’ll have different income streams is just another way of diversifying. However, if you worry about losing everything, make sure it’s not because you’re invested too aggressively.
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