Review: A sprint to the finish...

I plan to do a few reviews with my blogs. Here is one on an article that my daughter Monica sent me.

"Save and invest diligently for 30 years, then cross your fingers and pray your investments will double over the last decade before you retire.”
--Tara Siegel Bernard, "Your Money: With Retirement Savings, It's a Sprint to the Finish"

This is exactly what financial advisors have you do, the article goes on to say.  The expectation is that your money will double every nine to ten years. Therefore you will need to see your money double over the last ten years for you to reach your goal. Someone who has $500,000 in their 401K retirement account, ten years back and was hoping to see it reach $1.0 million would certainly have been disappointed. The last ten years was a lost decade, meaning no money was made if you look at a major index like SPY or the S&P500.

The answer is to save more money early in your career. Then reduce the amount in stocks to reduce risk and a large loss. You are more likely to reach your goal that way. I agree with the writer. Great point.

But what about all of us who are older and who have been unable to compound our way to the finish line with the lost decade? Well here are some recommendations.

Increase the amount of money you are contributing into your 401K retirement fund to 15 – 20% of your salary from the 5-6% people like to put away. That is assuming you have a good paying job. I know many cannot afford this; but the money for retirement has to come from somewhere.

Next I would keep the stock to bond ratio in line with your risk tolerance. In order to achieve your goals, you will want to be able to handle losses without pulling out or deviating from your plan. Higher the stock to bond ratio, the greater the drawdown your account will go through during recessionary times. It is better to save more and reduce the stock:bond ratio to 50:50 and stick to a plan.

But what plan?
Diversified investments split into 4-5 equal diverse funds in your 401K would be a good start. Rebalancing once per year is better than frequent rebalancing once per quarter. The market takes a while to change direction and rebalancing works better when done less frequently. Rebalancing simply means going back to equal allocation at year end. That would mean you will take money out of funds that went up and put them into ones that went down. Once per year is often enough. Check with a reliable financial advisor on this. Personally I think using this method is better than no method at all.

I prefer another method – a momentum method based on putting all your money into the strongest top 3-4 funds. This requires logic to decide which are the top rising funds. A ranked comparison of all the funds in your portfolio can provide that useful nugget of information. Check that strategy out by back testing it. Don’t take my word for it.

And finally, use technical analysis to get out of large drawdowns before they occur.