How to Think About Risk
When deciding how to save for retirement, investors have to steer away from both fear and greed and make sure to have an investment strategy that matches their individual risk tolerance.
"When investing for their retirement, most people think too conservatively," says Patrick Egan, director of asset management and product development at Thrivent Financial for Lutherans.
"I'm amazed at how many people have their money going into cash or short-term bond funds for long-term retirement savings. They're leaving a lot of potential return on the table."
Find Your Tolerance
Your risk tolerance is a measure of your unique ability to handle short-term price fluctuations or volatility and the potential for long-term loss. The process of assessing your risk tolerance and, consequently, determining how your retirement portfolio should be allocated among the major asset classes (stocks, bonds, and cash) is both science and art.The longer you have until retirement, and the longer you expect to live in retirement, the more you may want to consider having a larger proportion of your portfolio in stocks. With lead times of five years and longer, you are likely to have adequate time to recover from a potential stock market downturn.
Understand Your Options
Generally speaking, stocks are the riskiest asset class. They have the greatest volatility and are the most likely to result in the largest gains and losses. Investing in cash alternatives, such as money market funds or bank CDs, are the least risky, while bonds occupy the middle ground.
Egan suggests that depending upon your risk tolerance, "one model of the classic, moderate, long-term investor should be anywhere from 50-60% in stocks. If you're comfortable with a more aggressive approach, then you might consider having up to 80-90% of your retirement assets in stock during your 20s, 30s and 40s."
Those already at the age of retirement may still have to work, but they should continue to include stocks in their portfolio. "You don't use all that money the day you retire," Egan says. "You've got to try and grow that money for some time. Most people will need to be, depending on their risk tolerance, 10-50% in stocks well into their 70s and beyond. Otherwise, you run the risk of outliving your savings."
Create Your Portfolio
When you take a systematic approach to determining your time horizons and assessing your ability to tolerate risk, you can structure a retirement portfolio that's right for you. The goal is to avoid low returns that can result from being too timid or painful losses that can come from being too brash. Contact a Thrivent Financial representative to help you create a balanced portfolio that works for you!
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