Rich Women Rock is a blog and online resource designed expressly for women. Here, we will talk about how to put the past behind you and begin making healthy, smart, and maintainable choices to secure your financial future.
When the markets and the economy are behaving badly, as they tend to do from time to time, it’s easy to feel helpless. But creating a solid financial foundation can help you gain control of your investments and possibly avoid mistakes that can sabotage your portfolio.
Your Net Worth — A Place to Start
Having a current picture of your finances is an important first step in building a solid foundation. By determining your net worth at the same time every year, you’ll know what sort of financial shape you’re in and whether you’re making progress toward your goals. To find your net worth, list all of your assets, including bank and investment accounts, real estate, retirement plans, life insurance, business interests, etc. Then subtract your liabilities, such as your mortgage, credit card debt, loans, etc. The amount that’s left is your net worth. If you don’t like the number, look for ways to either decrease your debts or increase your assets.
Lost Without Them
Setting specific goals can help you focus your investing efforts. Prioritize the goals you’ve set according to their importance and your time frame for needing the money. Keep in mind that the goals you have now will probably change over time, so be flexible. Revisit your goals periodically and revise them when necessary.
Make It Personal
You can’t control what happens in the economy, but you can control your own behavior. Instead of worrying about whether the market is up or down or which investments will be hit hardest by a decline, think about the things you can do that could make a difference. Investing money on a regular basis or adjusting your portfolio’s asset allocation are steps that can help put you in control.1
Think about creating a written investment statement that describes your risk tolerance, rebalancing schedule, and reasons for selling an investment.2 Having guidelines to follow can keep you from making mistakes that might thwart your plans. You might also want to review your own financial track record. Tax returns and brokerage statements can tell you a lot about your past successes and failures. Keep in mind that past performance is no guarantee of future results.
1Asset allocation and dollar-cost averaging do not assure a profit or protect against a loss. Dollar-cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares though periods of high and low prices.
2Consider the tax consequences when selling investment shares. Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.
When it comes to investing, many people associate risk with losing money. But investing entails different types of risk. Understanding each type — and the potential return associated with your retirement portfolio — can help you determine whether your investments are appropriate for your situation.
Examining Risk and Return
Stocks historically have exhibited the highest level of market risk — or the potential that an investment may lose money in the short term. Over long periods of time, however, stocks have outperformed both bonds and cash investments.1 This risk/return tradeoff may influence how you allocate your investments. For instance, consider weighting assets that you intend to keep invested for 10 years or more toward stock investments.
Bonds carry their own risks — credit risk, or the possibility that a bond issuer could default on interest and principal payments; and interest rate risk — the chance that rising interest rates could cause a bond’s price to fall. Ascending interest rates historically have influenced the prices of bonds more directly than the prices of stocks.1 When short-term rates are on the rise, investors may sell older bonds that pay a lower rate of interest — causing their prices to fall — in favor of newly issued bonds that pay higher interest rates. On the plus side, bonds historically have exhibited less short-term volatility that stocks, although past performance is no guarantee of future results.
It’s also important to look at cash investments, such as 3-month Treasury bills, from a vantage point of risk and return.1 Although Treasury bills typically experience a low level of volatility, they may be subject to inflation risk — or the possibility that their returns may not keep pace with the rising cost of goods and services. For this reason, you may want to use cash investments for short-term situations when you expect to access your money within 12 months or less.
Putting Risk in Perspective
Because all investments entail risk, you may want to review your mix of stocks, bonds, and cash investments with an eye toward creating a risk/return profile that is appropriate for your situation. Owning different types of assets may increase your chances of experiencing the benefits associated with each, while mitigating the corresponding risk. Your retirement portfolio won’t be risk free, but you will have the confidence of knowing that you’ve done what you can to manage a potential downside.
This article offers only an outline; it is not a definitive guide to all possible consequences and implications of any specific investment strategy. For this reason, be sure to seek advice from knowledgeable financial professionals.
1Source: Wealth Management Systems Inc. For the 30-year period ended December 31, 2013. Stocks are represented by the Standard & Poor’s Composite Index of 500 Stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Investing in stocks involves risks, including loss of principal. Bonds are represented by the Barclays U.S. Aggregate Bond index. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Cash is represented by the Barclays 3-Month Treasury Bills index. It is not possible to invest directly in an index. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value. Past performance is not a guarantee of future performance.
In the sports world, a mental error can cost your team the big game. When you are investing, a mental error can put your retirement portfolio at risk. Mistakes often result from letting misconceptions and emotions affect your decisions.
Successful investing generally requires logic and reasoning. To avoid a fumble, you may want to guard against these four behavior patterns.
Some people tend to overestimate their investment abilities. Like the overconfident quarterback who always wants to throw a pass, the overconfident investor may want to change investments frequently. However, any changes in your investment strategy should be based on careful consideration, not “gut feelings.” Rash decisions could cost you the game.
Freezing Under Pressure
Fear of being tackled can cause a player to freeze up on the football field. Likewise, fear of making an investment mistake can cause a retirement investor to postpone decisions. For example, an investor may delay switching out of an investment that has consistently underperformed. While the investor is lingering over the decision, the investment may be losing even more value. If you determine that an investment no longer fits in with your game plan, the sooner you make the substitution, the better.
Assuming a Winning Streak Is Unbreakable
If an investment, or its sector, has performed extremely well over the long term, you may believe it is unbeatable. But even the best teams may lose at some point — and even the most consistent investment may sometimes falter. Instead of simply assuming a “star” investment still has a winning record, periodically review its performance. If it experiences a temporary setback but still fits in with your game plan, you may want to keep it in your roster. But, if a former winner is now on a long-term losing streak, it may be time to switch investments.
Focusing on Short-Term Losses Instead of Long-Term Gains
In football, a long pass down the field may lead to a touchdown. But it’s also very risky because the other team could intercept the ball. Like a long pass, a stock investment can be risky because of the potential for losses. Stocks, however, also offer greater potential for long-term gains than less risky asset classes. For a better chance of getting into the end zone, retirement investors may want to include stock investments in their portfolios.
Your situation is unique, so be sure to consult a professional before taking action.
Women often face greater obstacles when it comes to investing for retirement. On average, women work fewer years and earn less than men. This means that they have lower pension and Social Security benefits. But they also have longer life expectancies, so they need to save even more for a longer retirement. Women must also consider the fact that a couple’s retirement savings may be significantly diminished by health care costs for the spouse who dies first — which is statistically more often men than women.
In order to make up for these discrepancies, women may need to invest more aggressively and begin contributing to their retirement savings as early as possible. Historically, equity investments have provided higher returns over the long term than less-risky investments like money markets and short-term bonds. However, the higher potential returns of equities should be weighed against their higher risk as well as your own goals and risk tolerance.
Women should also take steps to obtain information about the retirement benefits that are available through employers and actively participate in any plans offered. An investment professional is an excellent source of information and guidance to sort through the many choices available. Most important, women need to recognize the unique challenges they face and start saving and investing as early as possible to overcome them.
Men and women may not be on equal footing when it comes to investing for the future. On average, women work fewer years and earn less than men, but they also tend to live longer.1 Therefore, women must focus on the concerns that are unique to them when planning for retirement.
Women Don’t Invest Differently …
Unfortunately, some negative stereotypes still exist about a woman’s ability to manage money, which may cause some women to feel they shouldn’t make their own investment choices. Some leave the decision making to their husbands, which can result in their being ill-equipped to handle their finances if they outlive their spouses.
Despite the stereotypes, studies show that the majority of married women actively participate or take the leading role in managing family finances.
Educating themselves about investments and long-term planning can help women feel more comfortable with riskier — yet potentially more rewarding — investments. As more women enter the field of financial advising and planning, female investors may also be more inclined to seek advice from other women.
… But There Are Real Obstacles to Overcome
Women earn only about 83 cents for every dollar earned by men.2 Because they earn less, women often are unable to invest as much as men. However, in order to make up for other discrepancies in retirement benefits, women may actually need to invest more.
For example, because women often leave work to bring up children or care for elderly relatives, they have fewer total working years. On average, they spend seven years out of the workforce to care for family members.3
This may mean that women qualify for lower pension benefits. Fewer years in the workforce, fewer years with a single employer, and lower pay are all factors that may contribute to a lower average pension for female retirees. At the same time, women on average live longer than men. That means they must provide for more years in retirement than their male counterparts.
As a result of some of these factors, women may also receive lower Social Security benefits than men. Social Security benefits are calculated based on a person’s highest 35 years of earnings. If a benefit recipient doesn’t have 35 years in the workforce, the Social Security Administration will add zero-earnings years to his or her record to equal 35 years. This will lower the average monthly earnings figure and may result in lower benefits for women who have not worked for a total of 35 years.
Finally, because women tend to live longer than men, not only can they expect to spend more years in retirement, but they must consider the fact that a couple’s retirement savings may be diminished by health care costs for the spouse who dies first.
On average, women …
Live longer than men1
Receive lower pension and Social Security benefits in retirement1
Earn about 83 cents for every $1 earned by men2
Spend about 7 years out of the workforce to care for family members3
Working Toward a Solution
While there is clearly a gender gap in earnings, data from the Bureau of Labor Statistics has shown improvements in women’s earnings. Higher earnings for women could mean the potential for more investments.
Nonetheless, the bottom line is that in order to make up for differences in earnings and benefits, and more retirement years due to longer life spans, women may have to invest more.
There are a number of steps women can follow when planning for a comfortable retirement:
Carefully consider how much risk you are willing to take in exchange for the potential to earn higher returns. Historically, equity investments have provided higher returns over the long term than less risky investments like money markets and short-term bonds, although past performance is no guarantee of future results.
Obtain information about the retirement benefits that are available through your employer, and actively participate in any plans offered.
Seek education about the investment vehicles that can help you reach your retirement goals. An investment professional is an excellent source of information and guidance to sort through the many choices available.
Contact local professional/trade associations, women’s groups, community colleges, and adult education centers in your area for information on investment or personal finance seminars taking place.
Most important, women need to recognize the unique challenges they face and start saving and investing as early as possible to overcome them.
1Source: U.S. Census Bureau, Income and Poverty in The United States: 2014
2U.S. Census Bureau, median earnings, 2016
3Source: U.S. Department of Labor, 2009 (most recent data)
Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. A big risk of market timing is missing out on the best-performing market cycles; missing even a few months can substantially affect portfolio earnings. Moreover, guessing the market’s timing is not easy, and even many professional money managers have misjudged significantly.
For individual investors, a better alternative over the long run may be a buy-and-hold strategy. But a buy-and-hold strategy should still include regular portfolio checkups and balancing as necessary.
Sports commentators often predict the big winners at the start of a season, only to see their forecasts fade away as their chosen teams lose. Similarly, market timers often try to predict big wins in the investment markets, only to be disappointed by the reality of unexpected turns in performance. It’s true that market timing sometimes can appear to be beneficial. But for those who do not wish to subject their money to such a potentially risky strategy, time — not timing — could be the best alternative.
What Is Market Timing?
Market timing is an investing strategy in which the investor tries to identify the best times to be in the market and when to get out. Proponents maintain that successfully forecasting the ebbs and flows of the market can result in higher returns than other strategies. Critics, however, note that changes in a market trend can appear suddenly and almost randomly, making the risk of misjudgment significant.
Market Timing Has Its Cost
One of the biggest costs of market timing is being out when the market unexpectedly surges upward, potentially missing some of the best-performing moments. For example, an investor, believing the market would go down, sells off equities and places the money in more conservative investments. While the money is out of stocks, the market instead enjoys a high-performing period. The investor has, therefore, incorrectly timed the market and missed those top months.
The opposite of market timing is buying and holding as the market goes through its cycles. This table illustrates the potential results from poor market timing compared with buying and holding.
The Risk of Missing Out
Miss 10 Top-Performing Months
Miss 20 Top-Performing Months
Perhaps the most significant risk of market timing is missing out on the market’s best-performing cycles. The three columns represent the growth of a $1,000 investment beginning in 1987, 1997, and 2007, and ending December 31, 2016.
Row 1 shows the investment if left untouched for the entire period shown above; Row 2 shows the investment if it was pulled out during the 10 top-performing months; and Row 3 shows the investment if it was pulled out during the 20 top-performing months.
Buy and hold, however, doesn’t mean ignoring your investments. Remember to give your portfolio regular checkups, as your investment needs will change over time. An annual review can help ensure that the investments you select are in keeping with your goals and time horizon.
Time Is Your Ally
Clearly, time can be a better ally than timing. The best approach to your portfolio is to arm yourself with all the necessary information, and then take your questions to a financial advisor to help you with the final decision making. Above all, remember that both your long- and short-term investment decisions should be based on your financial needs and your ability to accept the risks that go along with each investment. Your financial advisor can help you determine which investments are right for you.
Here’s what you need to know about this popular investment option:
If you are like many investors, researching, selecting, monitoring, and adjusting your investments and asset allocation within your retirement plan can be a time-consuming burden. One possible strategy to consider may be a target-date fund.1
A target-date fund takes much of the decision making out of which asset classes to own, at which percentage weights, given your estimated retirement date. As that “target” date approaches, the manager of a target-date fund automatically adjusts your allocations to reduce your market risk.
Here are some basic facts about target date funds that you should know before you buy:
It is a popular option for retirement plans.
Target-date funds are growing in popularity as investment options in qualified plans. In fact, as of December 31, 2016, 88% of target-date mutual fund assets were held through defined contribution plans and IRAs, according to the data from the Investment Company Institute.2
It offers one-stop diversification and rebalancing.
A target-date fund is a single investment option that provides a diversified, professionally managed allocation to stocks, bonds and other investments.3 The allocation is automatically rebalanced to a preset target allocation based on your retirement horizon and becomes more conservative over time.
A target-date fund follows a more conservative “glide path” as your retirement approaches.
Let’s say you are 37 years old and expect to retire at age 67, or 30 years from now, so you consider looking at a target-date fund with that same 30-year time horizon. If you choose to invest in this fund, it might begin with an 85% allocation to stocks and 15% allocation to bonds. As you approach age 47, that allocation might gradually switch to more of a 70%/30% stock/bond allocation to reduce some of the stock market risk. This shift in asset allocation over time is known as the fund’s “glide path.”4 As you approach your retirement age of 67, that glide path might incorporate a higher allocation to bonds and cash than stocks.
The glide path design can be very different from fund series to fund series.
Fund providers treat the allocation to stocks in target-date funds very differently. Some view continuing exposure to stocks past the normal retirement age of 65 as being less desirable for investors, and therefore eliminate or sharply reduce the allocation to stocks at age 65. Other fund providers view exposure to stocks as being important to continue “through” retirement age. Therefore, it’s important to incorporate your personal view of risk when evaluating target-date funds.
A target-date fund can be actively or passively managed, or follow a mixed approach.
Different managers can follow different asset management approaches. Some invest all of their assets in actively managed mutual funds, and others in index funds. Some use a mix of active and indexed investments, including exchange-traded funds (ETFs).
A target-date is designed to be a standalone investment.
Some plan participants combine multiple funds in their retirement accounts to provide more diversification. A target-date fund is intended to be a plan participant’s sole investment within his or her plan. It’s important to note that selecting multiple options may result in a participant incurring more risk.
The general objective of a target-date fund is to generate the appropriate amount of asset accumulation to produce an adequate amount of retirement income over the course of your retirement. Of course, there can be no guarantee that any target-date fund will meet this objective.
1 Please note the principal value invested in these funds is not guaranteed at any time, including at the specified target date.
2 “Eighty-eight percent of target-date mutual fund assets were held through defined contribution (DC) plans, ICI finds”, PLANSPONSOR, March 23, 2017. https://www.plansponsor.com/Bulk-of-Target-Date-Funds-in-Retirement-Accounts/
3 Diversification and rebalancing do not protect against loss or guarantee a profit. All investing involves risk, including loss of principal.
4 These hypothetical asset allocation examples are intended solely to illustrate the concept of the glide path. They are not meant as investment advice.
Disclosure: This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.