Recs

8

New Rules for Retirement Investing

Many of the rules for maximizing retirement portfolio performance are the same as those for any other portfolio: Stick with low-cost options like index funds unless you're a good stock picker, diversify, keep long-term money in the stock market, rebalance, etc. But retirement portfolios differ in a couple of important respects from a "regular" long-term portfolio:

  • Retirement accounts are tax-advantaged;
  • You contribute new money on a regular basis.

I recently talked a bit about how best to use your tax-advantaged retirement accounts in the context of your overall portfolio. But generally, unless you're into fancy trading strategies involving options and short-selling, investing in a tax-advantaged account isn't that different from investing in a taxable account -- with one notable exception.

New-money blues
Retirement accounts' big difference is their constant stream of new money for investment. Many investors, especially in 401(k) plans, simply choose to invest new money proportionally in their existing mutual funds, in accordance with their asset-allocation plan. But when making monthly or quarterly contributions to an IRA, when minimum investment limits (on funds) and commissions (on stock trades) come in to play, that choice may not be practical. In fact, you may need to decide on a single investment each time you contribute.

If you're an avid stock picker, that might be good news: You get to put a new idea to work every time you contribute money. But many of us aren't. Are there rules of thumb that would help us decide which of our existing investments to add to? And do these rules of thumb offer better performance than the add-a-little-to-everything strategy in a 401(k)?

What to buy and when
I've struggled with this question in my own portfolio. On the one hand, I know that chasing performance can be a recipe for disaster -- you can end up buying at the worst possible time. But too often, if I decide not to buy or add to positions in a sector that has gotten hot, things just keep going up and up.

In the end, you have to find a balance. If you're going to focus on short-term performance, then whatever you do is a gamble. But if you're really a long-term investor, the ups and downs should even out over time. And sometimes, stocks with great potential are worth paying up for -- even if you already have them in your portfolio.

But won't that throw my portfolio out of whack?
Of course, putting new money into shares of companies you already own in your portfolio can mean that you have a highly concentrated portfolio. This ties in to the rebalancing question; most advisors believe that regularly rebalancing your portfolio is a good thing.

But too often, rebalancing has its own costs. For instance, say you owned a portfolio that originally included equal weights of stocks like Garmin (Nasdaq: GRMN  ) , Starbucks (Nasdaq: SBUX  ) , and Ford (NYSE: F  ) . The values of your positions would have gotten wildly skewed over the last couple of years: Garmin's share price has tripled on strong GPS sales, while Starbucks' price has more or less run in place as growth has leveled off, and Ford's has declined as the company works through a heavy dose of trouble.

If you had been adding new money to Garmin during that period, you would have seen even greater gains -- yet the imbalances at the end of the period would have been even greater, too. But if you had been rebalancing every six months over that period, you would have been selling off Garmin throughout its growth spurt -- and buying Ford during a period of decline. That's not a recipe for success, either.

At some point, the risk of having too much of your nest egg in a hot growth stock like Garmin outweighs the potential reward. But how do you know when you've gotten to that point? I struggle with that, too -- I hate to take profits if the stock keeps going up, but I also dread missing out on what proves to be the top of the market.

Doing the analysis
When I feel like my emotions are getting the better of my decision-making, I try to find some research on the subject to re-ground my thinking. Recently, the Fool's Rule Your Retirement newsletter service took a closer look at where to put new money to work, and how best to rebalance your portfolio. As it turns out, some of the traditional rules of thumb about these issues don't match up with past history.

If you're not already a Rule Your Retirement subscriber, you can still take a look at this research. Just by signing up for a free 30-day pass, you'll be able to see all of Rule Your Retirement's past issues, insightful commentary, and discussion boards to help you bounce ideas off fellow Fool Community members. Take a look today, and start learning more about the best ways to invest for a successful retirement.

Fool contributor John Rosevear does not own any of the stocks mentioned above. Garmin and Starbucks are Stock Advisor recommendations. The Motley Fool's disclosure policy never rests.


Read/Post Comments (1) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 23, 2008, at 11:32 AM, Rouxsdad wrote:

    I'm just now starting to plan for retirement at 50. The old "He didn't plan to fail, he just failed to plan" syndrome. I took an online survey for developing an investment plan and was told that I need a minimum of 50k to have any chance of having the income I'll need to survive at 60. I will take some risk to get there, but I don't have a lump sum of 50k. What do I do?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 533882, ~/Articles/ArticleHandler.aspx, 11/1/2014 9:58:43 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Rosevear
TMFMarlowe

John Rosevear is the senior auto specialist for Fool.com. John has been writing about the auto business and investing for over 20 years, and for The Motley Fool since 2007.

Today's Market

updated 12 hours ago Sponsored by:
DOW 17,390.52 195.10 1.13%
S&P 500 2,018.05 23.40 1.17%
NASD 4,630.74 64.60 1.41%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/31/2014 4:02 PM
F $14.09 Up +0.14 +1.00%
Ford CAPS Rating: ****
GRMN $55.48 Up +1.34 +2.48%
Garmin CAPS Rating: *
SBUX $75.56 Down -1.76 -2.28%
Starbucks CAPS Rating: ****

Advertisement