Investing for Retirement: 10 Time-Tested Techniques

1. Invest for growth

Even a mild rate of inflation will increase your cost of living and erode the purchasing power of your money over the years. For example, even with only a modest 3% average annual increase in inflation, what you can buy for $1,000 today will cost you $1,344 in 10 years, and $1,806 in 20 years.

Over the long haul, stocks historically have outperformed inflation, bonds, and other investments. That's why the standard financial advice is to invest your retirement savings in a diversified portfolio that includes both bond and stock investments.

2. Evaluate your investment mix

Because no one can regularly predict how investments will perform in the future, dividing your money among the different types of assets is a way to help reduce risk.

Diversifying your investments also can smooth out your portfolio's ups and downs because gains from one type of asset can offset declines in another. For example, in the mid-1980s international stocks prospered and from 1975 to 1983 U.S. small-company stocks had a great run. Then in the mid- to late-1990s, U.S. large-company stocks topped the charts--especially technology and telecommunications stocks. But in the year 2000, bonds raced ahead while stocks started a losing streak.

A well-diversified portfolio still can decline, of course, but it may be less volatile than a nondiversified portfolio.

3. Set your asset allocation plan

Your target investment mix depends on your age, overall financial situation, and tax bracket. Also importantly, it depends on your financial ability to withstand losses and how much risk you need to take to meet your retirement goals.

An investment professional or tools provided by your financial services firm can help you determine your specific asset allocation plan.

4. Review your portfolio

Annually evaluate how your investments are performing by comparing returns to their appropriate benchmarks.

For example, measure how large-company stock mutual funds are performing compared with similar type funds and the Standard & Poor's 500 Index, and compare small-stock mutual funds with funds in the same class and the Russell 2000 Index.

5. Brace yourself for down years

According to Crandall, Pierce & Company, Libertyville, Ill., since 1945, there have been 21 corrections (a decline of between 10% and 20%) and nine bear markets (a decline of at least 20%), as measured by the Standard & Poor's 500 Index of large-company stocks.

Bear markets ranged from a drop of 21.6% from Aug. 2, 1956 to Oct. 22, 1957, to the more recent drop of 49.1% from March 24, 2000 to Oct. 9, 2002. Bear markets lasted from about three months to about three years.

6. Focus on the long term

Although history can't predict the future, despite the downturns, the market always has recovered. In fact, large-company stocks, as measured by the Standard & Poor's 500 Index, have outperformed all other types of investments since 1926, returning an annual average gain of about 10%.

Plus, time has been a stock investor's ally. In fact, according to Ibbotson Associates, Chicago, out of the 70 rolling 10-year periods since 1926, there only have been two in which large- and small-company stock returns have been negative.

Although time eventually has smoothed out the ups and downs over the long haul, returns varied greatly from year to year and decade to decade. And even if stocks do outperform in the future, you shouldn't count on the unprecedented double-digit returns of the 1990's.

7. Invest regularly

Despite market conditions, start or continue to invest regularly through employer-sponsored retirement plans or mutual fund automatic investment plans. Investing a fixed amount of money at regular intervals, called dollar-cost averaging, turns the market's ups and downs to your advantage. That's because your money buys fewer shares when prices are up and more when they're down.

While this strategy doesn't guarantee profits or protect against losses, over the long run it lowers your average investment cost and increases the potential for higher returns. Plus, regular investing is a disciplined way to avoid trying to time the market.

8. Don't chase performance

Keep informed, but don't be swayed from your long-term investment plan based on market fluctuations or the barrage of conflicting commentaries from market analysts. Furthermore, don't be influenced by the latest trends, and resist the temptation to shift all your money into the winners of the day.

Investors who loaded up on technology and telecommunications stocks in the late 1990s are only the latest example of those who learned first-hand about the pitfalls of chasing past performance. Those investors suffered huge losses as the NASDAQ Composite Stock Index plunged some 78% between March 10, 2000 and Oct. 9, 2002.

9. Stay on track

What about trying to sell before another market downturn and then trying to get back in before an upswing? Or trying to predict market winners by shifting money among different types of investments?

Unfortunately, there's no way to regularly predict where the market is headed or how investments will perform in the future. As studies have shown, and as many investors--the pros included--have found, there's no way to succeed at market timing for very long.

Plus, one risk of jumping in and out of the market is that you'll miss the rebounds. That's because most stock market gains have occurred in short, unpredictable bursts.

10. Maintain your balance

Review your portfolio at least once a year and consider rebalancing if your investment mix has strayed from your target mix by 5% or more. That means selling investments that have performed best and are overweighted and buying investments that have become underweighted.

Granted, it may be counterintuitive to sell your winning asset classes and buy the losers. But in addition to maintaining your target mix, rebalancing your portfolio forces you to buy low and sell high relative to past levels, as well as to lock in your gains.

For example, during the 1990s bull market, if your stock investments became overweighted you could have rebalanced your portfolio by buying bonds. The result: You would have locked in some of your stock gains while building up your bond investments to return to your target mix.

Bobbie Shocket Lazarz, Certified Financial Planner Professional^TM, MSW, MBA, is the primary author of the CUNA Mutual Group's Education Center Web site. Lazarz has been educating credit union members about personal finance for 15 years. The CUNA Mutual Group is the leading provider of financial services to credit unions and their members worldwide.

Published April 4, 2005