Photo: Ted Sali via Flickr
There is no better time than the present to review our Personal Retirement Portfolios. The end of the third quarter is quickly approaching and we will soon be receiving our September 30th account statements in the mail.We have always said that Investing is a personal decision. You don’t have to be a Personal Finance Professional to know what you want when it comes to your Retirement Portfolios; no one knows what we want better than us. I recently had a conversation with my Mother regarding her Retirement Portfolio. My Mother is concerned because she has seen a significant loss in her Retirement Portfolio and she feels that she will never be able to afford retirement.
In the past when my Mother has asked me for Investment Advice I have politely avoided the subject for two reasons; first, I don’t like to mix my professional life with my personal life and second, I live in a state (well actually a province) different from My Mother and I am not licensed to give investment advice outside of my geographical region. I also really hate it when people come to see me as a Financial Planner with tips from friends and neighbours. It really bothers me because they are seeking my advice as a Professional Financial Planner, but they don’t trust me as much as they trust their family member or neighbour, who is not a Professional. I don’t know what came over me during this particular conversation with my Mother, but I decided to give her investment advice. Well actually I just asked the right questions so that she could take her own advice.
What is Your Risk Tolerance?
My Mother is currently invested in Stocks. She has a Stock Broker who buys and sells Stocks on her behalf while charging her an annual as well as a per transaction fee. When she told me about the losses in her Retirement Portfolio I asked her Why she is invested in Stocks? What does my Mother know about investing in the Stock Market? Without hesitation my Mother replied “Absolutely Nothing.” This is the first rule of investing; never invest in something that we don’t understand. My Mother is uncomfortable with the risks associated with investing in Stocks; upon realising this she decided that she wants to start investing more conservatively.
When reviewing our Retirement Portfolios we should never look at our losses in dollar amounts; we should always view our losses as a percentage rate of the entire portfolio. The reason is because $5000 may be a big loss to me, but it may not be a big loss to someone who has over $1 million in their Retirement Portfolio. If you are not comfortable losing up to 15% of the value in your Retirement Portfolio, then don’t invest in something that risky. Portfolio Diversification is the percentage of each asset mix (liquidity’s, fixed income, domestic equity, foreign equity) that we have in our Retirement Portfolios. If we aren’t comfortable with the risks associated with owning individual Stocks then we shouldn’t have a Stock Broker.
What is Your Investment Objective?
If picking, choosing and researching different Stocks, Bonds, and ETFs is not your thing, then don’t do it. Investors can simplify their Retirement Portfolios by investing in Mutual Funds. Mutual Funds are an already well diversified investment because one Mutual Fund can hold several different investments (Stocks and Bonds). My Mother told me that she was investing in Stocks because she wanted her investment portfolio to grow, however she didn’t think about the potential losses. My Mother made the decision that she no longer wants to have stocks because she is no longer looking for growth; my Mother now wants stability in her Retirement Portfolio.
Since My Mother’s Retirement Portfolio is currently at a loss (the Cost Base is higher than the Market Value) it is not the right time to sell her investments. Since she no longer needs the “assistance” of a Stock Broker but she still has to hold the Stocks I advised her to transfer all of her accounts (there are 4 in total) to a Self Directed Brokerage Firm. This will allow her to hold the Stocks in her Retirement Portfolio until the value increases and she can sell them to reinvest in more conservative investments. It will also save her money in the form of the quarterly and transactional fees that were being charged by her Personal Stock Broker.
What is Your Time Horizon?
My Mother is 55 years old and she plans to retire at 65. Currently my Mother’s losses are only “on paper”. As frustrating as it is to see the value of our Retirement Portfolio decline, it really doesn’t cost us anything because we haven’t physically taken the loss. If my Mother acted on her emotions and sold all of her investments (which she wanted to do) she would have actually realised this ” paper loss” and that would have been bad. A big mistake that Investors make is investing emotionally. We have to remember that investing is business, it’s not personal.
Our Retirement Portfolio should be diversified based on our Time Horizon, we always have to keep our target date in mind. Short term fluctuations are normal in the market, and that is ok if we are investing for the long term. If our target retirement date is two years from now then we should have investments with the same time horizon. Someone who is retiring in 10 years should never have the same investments as someone who is retiring in two years.
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