401(k)s & IRAs For Dummies by Ted Benna & Brenda Newmann

Author:Ted Benna & Brenda Newmann [Benna, Ted & Newmann, Brenda]
Language: eng
Format: epub
ISBN: 9781119817260
Publisher: Wiley
Published: 2021-10-01T00:00:00+00:00

Forging Your Own Investment Trail

Different types of funds serve different investment objectives. Broadly speaking, objectives can include growth (capital appreciation), income, and capital preservation (which I explain in just a second).

Long-term investors (those with at least ten years before they may need the money) usually invest primarily for growth. When you invest long term, you don’t want an immediate return such as interest or dividends. Instead, you want your investments to increase in value, so that when you’re ready to sell them, they’ll be worth a lot more than you paid for them. You’re willing to take on a certain amount of risk for the possibility of a higher return. The most common investment for this type of strategy is stocks — of all kinds.

Within five to ten years of retirement, you can cut back your level of stocks by shifting into less volatile investments, such as bonds and stable value funds, to reduce your risk. You may also shift the remaining stock portion of your portfolio from more risky stocks (generally growth-oriented companies) to less volatile ones (generally value-oriented companies). This is a capital preservation strategy. You want your money to grow at a rate that will at least beat inflation, but you want to reduce your risk of losing money. The long-term return of this portfolio will probably be lower, but at this point, you’re more concerned with preserving your capital.

Some retirees who are very concerned about preserving capital during their retirement years typically invest to generate an income through interest and dividends. A problem with this strategy is that you have little or no hedge (protection) against inflation. In addition, you can’t count on companies that pay high dividends to always do so. Dividends are one of the first things to be cut when profits shrink. You need income during your retirement years, but you can collect it in other ways. I recommend using an automatic withdrawal plan from mutual funds or an annuity rather than trying to find investments that will generate enough income through interest and dividends. In any case, you should probably still keep at least 25 percent of your money in stocks, because retirement can last for 20 years or more, and your money needs to keep growing.

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