Keeping a Healthy Mix in Your Retirement Investing Strategy

The percentage of adult Americans who invest toward retirement is nearing an all-time high at over 63%⁶. These days it’s far easier to choose different investment instruments to grow and preserve wealth, and over the past few decades the average working person has realized that investing isn’t only for the rich. Whether you are new to investing or have some experience, it can be challenging to create a portfolio that aligns with your financial goals.

There are several ways to “mix” your investments. You can invest in different instruments which are also broken up into sectors (both listed below). This is generally called “diversification.” The goal of diversification is to help avoid losing significant money from investments that don’t turn out as you may have hoped.

However, just because you are diversified doesn’t mean you selected a safe composition of investments¹. For example, if you have many different high-risk penny stocks, the diversification may not have done much to decrease the risk that you could lose money. You have to be prudent in your investment decision-making and understand how each asset works.

Some of the investment instruments people consider for their portfolio include:

• Stocks – Fractional ownership interest in a company. If the company does well, the investor tends to do well and vice versa.

• Bonds – A debt security, like an IOU. Borrowers issue bonds to raise money from investors who earn interest over time.

• Mutual Funds – A company that pools money from investors and invests the money in securities such as stocks, bonds and short-term debt. Unlike ETFs, mutual funds can only be bought and sold at the end of the trading day².

• Exchange-traded funds (ETFs) – A collection of securities that tracks sectors of the market or seeks to outperform an underlying index. Unlike mutual funds, ETFs trade throughout the day on a stock exchange and their price fluctuates based on supply and demand³.

• Fixed-income investments – (that aren’t bonds, such as certificates of deposit (CDs), money market funds, and commercial paper). Sometimes preferred stock is considered fixed income since it is a hybrid security bringing together equity and debt features) – Debt instruments that pay a fixed rate of interest⁴.

• Annuities – Financial products that provide a guaranteed income stream. Investors fund the product with a lump-sum payment or periodic payments.

• Derivatives – Financial contracts between two or more parties that determine their value from an underlying asset, a group of assets or a benchmark. These tend to be higher risk investments, and you want to be extremely careful and consult a financial professional before treading in these volatile waters.

• Investment Trusts – A public limited company that strives to earn money through investing in other companies. Investment trusts are closed-ended funds with a fixed number of shares and can only be traded once per day at the end of the trading day. Investment trusts generally cost less to own that a similar mutual fund but are typically more expensive than an ETF.

The sectors investors select from include:

• Industrials – (Stanley Black & Decker, Caterpillar, A.O. Smith, etc.)

• Materials – (Sherwin-Williams, Amcor, Albemarle, Nucor, etc.)

• Real Estate – (Realty Income, Federal Realty Investment Trust, Essex Property Trust, etc.)

• Consumer Staples – (Coca-Cola, Walmart, Proctor & Gamble, Colgate-Palmolive, etc.)

• Energy – (Exxon Mobil, Chevron, Shell, Enbridge Inc, etc.)

• Financials – (LPL Financial, Aflac, Chubb, Franklin Resources, etc.)

• Utilities – (Consolidated Edison, Atmos Energy, NextEra Energy, Duke Energy, etc.)

• Information Technology – (NVIDIA, Apple, Microsoft, International Business Machines (IBM), etc.)

• Healthcare – (Johnson & Johnson, Abbott Laboratories, Kenvue, Pfizer, etc.)

• Consumer Discretionary – (Amazon, McDonald’s, Lowe’s, Target, etc.)
   

Return on Investment (ROI) and Compounding

You can verify this information by visiting the S&P Dow Jones Indices website: S&P 500 historical data. If you are an individual stock picker, you know that it is hard to beat the S&P 500 over time. Even the greatest investor of all time, Warren Buffett didn’t beat the S&P 500 over the past twenty years, missing matching its return by .05%. Learn more about Warren Buffett's performance.

What is the S&P 500 index? The S&P 500 Index or Standard & Poor’s 500 Index is a market-capitalization weighted index (market capitalization is the total dollar market value of a company’s outstanding shares of stock. Market value is the amount for which something can be sold on a given market) of the 500 leading publicly traded companies in the U.S. It’s considered one of the most accurate ways to measure top-tier American equities’ performance and the overall stock market.

Thanks to the advent of ETFs, in 1993, that mirror the S&P 500, investors are now able to buy shares of funds that aim to produce returns equal, or close that of the S&P 500. For an investor who doesn’t have the time to conduct their own research, these investment options could be very beneficial to their long-term retirement savings goals.

Another aspect of investing that is often overlooked is the power of compounding. Compounding occurs when your investment begins to earn interest on the interest as well as the principal. The longer you hold the investment the more extraordinary the compounding has the opportunity to become.

Albert Einstein is credited with saying, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it.” The secret to compound interest working in your favor is being patient. Morgan Housel, the author of “The Psychology of Money,” said, "You don’t have to be particularly smart or lucky to do well in the stock market. You just have to invest according to your risk tolerance and then be patient." Warren Buffett’s partner, investing legend Charlie Munger once said, “The first rule of compounding: Never interrupt it unnecessarily.” The concept when it comes to compounding and value investing over many decades is to buy and hold and wait. However, first you have to figure out your risk tolerance.
 

Determine Your Risk Tolerance

Everybody has a different risk tolerance based on their income level, lifestyle, life experiences and many more factors. It’s critical that you figure out your own risk tolerance and not somebody else’s because of FOMO (fear of missing out – anxiety that something exciting is happening and you are missing out), which can be damaging to your finances and significantly impact your financial condition and strategy.
 

Allocation of Assets

Based on your risk tolerance and your investment goals, you want to decide how you plan to allocate your investments⁵. For example, a percentage in stocks, bonds, etc. This includes how much you want to keep on hand in cash.

Being consistent with your investment allocation helps to lower volatility as you maintain your portfolio diversification. It helps to stay focused on your long-term goals and reduce impulsive decision-making based on speculative news. Remember, it is impossible to predict the future of the market or its volatility as much as it is futile to try and predict natural disasters, wars, and pandemics. Unexpected events happen in life, but consistency can help you navigate those unpredictable times.
 

Invest in What You Know

When it comes to investing, experienced investors often reiterate the importance of investing in what you know.

• Choose businesses and companies that you are familiar with their products and services.

• Start with stocks that you are familiar with and maybe several popular, low-risk ETFs.

• Once you are comfortable with how stocks work, you can research fixed-income assets (such as bonds, certificates and money markets).

• As you become more knowledgeable about how investing works you can begin to expand your portfolio with other forms of instruments and strategies.
   

Work to Master the Fundamentals

It’s hard to earn a dollar, but it isn’t as hard as you might believe to build wealth over time with the right guidance and strategy. And, you don’t have to have a high-income job to do it.

Think of investing as you would golf, boxing or any other sport or skilled hobby. We’ll use golf and boxing in this example: The next time you watch either sport, notice each player’s swing looks different and in boxing each fighter’s stance is unique; however, despite their different approaches they still are able to put themselves in the position to win. This is because they understand the fundamentals.

Investing is similar. You don’t have to have the same stock portfolio as your neighbor, co-worker, relative or investing influencer to do well over time. As long as you understand the fundamentals of investing and create the mix of investments that works for you, you and grow your wealth using your own unique strategy.

Everybody’s retirement and financial goals are different, their strategies are unique to them, their life experiences are distinct from their friends and neighbors, and the reasons why they make the decisions they do are personal. There is no right or wrong mix of investments when you are building a portfolio; however, there are strategies that may help you lower some of the risk of investing while preserving and working to grow your wealth.

If you have invested for a while, you probably understand that there are absolutely no guarantees that you will come out on top as an investor. Most great investors from Warren Buffett to Peter Lynch had a mentor that they learned from. They weren’t just born with financial acumen. Warren Buffett learned from Benjamin Graham. Peter Lynch’s lifelong mentor was George Sullivan. Getting help so you can improve your financial situation is a step that highly motivated investors take.
 

Consider Meeting with a Financial Consultant

Want to learn more about retirement planning? Just as history’s most notable investors sought the help they felt they needed, you too can do the same. Consider scheduling a complimentary meeting with a Landmark Investment Center financial consultant. They can help you create an investment portfolio and strategy that aligns with your retirement goals.


Learn More About Landmark Investment Center

Schedule a Consultation

 

This material was prepared by LPL Marketing Solutions and Landmark Investment Center.