EDITOR'S NOTE: Galaham Zuanich, an investment adviser for Morgan Stanley Smith Barney in Santa Cruz, will be writing a monthly column on personal finance. His column will appear Mondays.
Investing for retirement can be a difficult task. Here are some time-tested strategies that could work for you.
First you have to build and maintain a well-balanced portfolio that is right for your situation. You begin with an asset allocation. Investment assets typically are stocks or equities for growth, bonds or fixed income for income and stability, and cash or money market instruments for short-term cash needs.
Once you have determined how much growth vs. stability vs. short-term needs is right for you, then you should diversify. We have all heard that you shouldn't keep all of your eggs in one basket.
Diversification is the process of spreading your investment across the different asset types. The idea is that you want to protect yourself should a portion of your investments not go according to plan.
How much should you put in to each asset class? One of the best ways to answer this question is to be honest about your current financial situation and attitudes toward risk. Be sure to have enough stability in your portfolio that you can sleep at night. This is what I call the "sleep test." If you are up all night worried about your investments, then your portfolio doesn't pass the sleep test.
You should also consider your age. A younger person
can afford to be more aggressive and be primarily invested in stocks. If you are young, you have the advantage of time. History has shown that stocks outperform bonds and savings accounts. However, there are many wild swings along the way. Raise your hand if you remember the difficulties of 2008.Younger investors can better withstand major market pullbacks because they can wait out the difficult times. Older investors cannot risk their life savings in an effort to get higher returns.
Finally stay on track. Just as you check your vehicle's oil at least twice a year, you too should check your portfolio at least twice a year. You should be looking at your asset allocation mix.
Over time, some assets will increase in value and others will decrease in value. This will throw off your original asset allocation mix. If left unattended, you may find your mix has become too aggressive or perhaps too conservative for your situation. Regular rebalancing involves selling your assets that have appreciated in value and using those funds to purchase assets that have fallen in value.
Galaham Zuanich is a financial adviser with Morgan Stanley Smith Barney. Contact him at galaham.zuanich@morganstanleysmithbarney.com, morganstanley.com/fa/galaham.zuanich or 6004 La Madrona Drive, Santa Cruz, CA 95060.
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