As you may have found out the difficult way in 2008, your retirement account may not always be as safe as it seems to be. The great recovery we saw last year has done much to alleviate our financial pains, but you shouldn't use the rebound as an excuse to fall back on old habits. Instead of concentrating on which stock will be the next Google
Speaking from experience
Two years ago, my 65-year-old, still-working father suddenly passed away. He was healthy as an ox and tremendously active, so this was a severe shock to my entire family. Unexpectedly presented with the task of figuring out my family's financial situation, I dove into 30-odd years of paperwork -- brokerage statements, stock transactions, and the business that he left behind. Because my mother suffers from multiple sclerosis, she was unable to help relate any of my father's financial goals, plans, or philosophies. What I did know was that he tediously studied the stock market, furiously kept up with his assets, and in the tradition of my grandparents, he handled all of our finances himself.
I was fortunate that, for whatever reason, the majority of my father's assets were parked on the sidelines in either cash or CDs. This gave me time to determine the best strategy for my mother. Over the following months, I read every book I could on investing, retirement, asset allocation, tax implications, rollover IRAs -- you name it, I read it. Although I invested most of my mother's money in mid-2008, at one of the worst times in the past century, I feel confident that I made the right decisions. However, there isn't a day when I don't wonder what my father is thinking or what he would be doing if he were still here.
Make these three decisions
I am lucky to not only have had the most wonderful father in the world, but to also have had a mentor who was financially prudent. Nevertheless, there are certain things I've learned that I think every parent and investor should do as they approach retirement. I strongly believe that if you take these three steps, you will greatly increase your chances of financial success, for yourself and for your family.
1. Be proactive: With the advent of target-date retirement funds, many investors have become willing to accept the allocations that their funds provide. We now know this can be a dangerous proposition -- many target-date funds greatly underperformed in 2008 and put serious pressure on retirees. For instance, the Oppenheimer Transition 2010 Fund, created for those retiring this year and holding stocks such as JPMorgan Chase
(NYSE:JPM), Walt Disney (NYSE:DIS), and ExxonMobil (NYSE:XOM), lost 42% in 2008 versus the 36% loss of the S&P 500. The fund had 57% of its holdings in stocks; not necessarily outrageous, but definitely more aggressive if you are a conservative retiree. The problem with these funds is that while they may allocate assets appropriately, they take a very general formula and apply it to a vast number of people based solely on age. You are essentially trusting a manager to supervise your assets without knowing your specific goals. You are much better off doing the research on your own -- asset allocation should be based not on financial theory, but on how much money you'll need in the future.
2. Rebalance your portfolio: Every year, the market's ups and downs will shift the weight of your portfolio. For instance, at the beginning of 2009, you may have had a nice 60/40 mix of stocks/bonds. However, if some of your biggest holdings included Select Comfort
(NASDAQ:SCSS)or Human Genome Sciences (NASDAQ:HGSI), which both returned a whopping 1,000-plus percent last year, you might now be heavily overweighted in stocks. Not recognizing this could set you up for a catastrophe, should the market decide to nosedive again. The combination of a bear market and a portfolio overweight in equities is a recipe for disaster. Rebalancing and re-evaluating every year will force you to properly distribute your resources -- the most crucial part of asset allocation.
3. Communicate: This may be the most difficult task of them all. It's never easy to speak to your children or your spouse about future circumstances should you not be around to handle them. Nonetheless, taking the time to communicate to your loved ones your financial position and your strategy is the best thing you can do for them. This will ensure that you limit the amount of guesswork for them and will guarantee that the financial roadmap you so carefully crafted will be followed.
It's never easy
It's much sexier and more interesting to let others manage your money while you focus on picking a few market-beating stocks. But before you get to the fun part, take care of what's most important -- protect your assets by allocating them properly, make sure you check back annually, and let your family in on your plan.
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Jordan DiPietro doesn't own any shares of companies mentioned here, but will always be grateful for his father's immeasurable advice. Walt Disney and Netflix are Motley Fool Stock Advisor recommendations. Walt Disney and Microsoft are Motley Fool Inside Value choices. The Fool owns shares of Walt Disney. Motley Fool Options has recommended a diagonal call strategy on Microsoft. The Fool's disclosure policy has a sweet spot for banana bread.