Back to Basics

By Judy Loy, Registered Investment Advisor, ChFC® and CEO of Nestlerode & Loy, Inc.

During a steep downturn — think March 2020 or the 2008 Great Recession — investors tend to let fear rule their decisions. When stocks rise rapidly, investors tend to get greedy going after winners after they may already be overpriced. The best thing is to stick with the basics.

First, make sure the investment objective (IO) on your investments fit your timeframe and risk tolerance. Your IO will typically change as you get closer to retirement, but not always. Many people go from aggressive to growth to growth and income, adding more and more fixed income as they get closer to or into retirement. However, one of the biggest mistakes that investors make in retirement is going too conservative. The impact of inflation through retirement cannot be ignored and needs to be a part of planning. To maintain your standard of living over an average 18 years in retirement, you must get returns that are at least at the pace of inflation. As always, with return does come risk. If you want a more conservative portfolio, you will probably need to save more for retirement, all things being equal.

Once you have your risk tolerance and thus your IO, stick with it. In good times and bad, staying the course makes the most sense. The times you are nervous (think March 2020) and the market is sinking is the perfect time to buy, not sell. 

Another basic investment idea is diversification, or not putting all your eggs in one basket. This does not mean seven different growth mutual funds that may have the same top 10 holdings. It means looking at the array of stocks, bonds, REITs, etc. and allocating into each to match your investment objective. A big no-no is having too much in one company. I have seen employer retirement plans where the employer stock was over 40% of retirement. Apple (AAPL) may be a great company and a great stock, but it should not be your entire portfolio. For a diversified portfolio, holding 12-18 individual stocks is a thumbnail for limiting systematic risk. Also, those 12-18 stocks should be in various industries. Buying all the hot tech growth stocks is not diversification. You will love it when they all go up but think quite differently when they get hit, like when the 2000 tech bubble burst.

In addition, look at your fixed income assets. If you hold assets outside of retirement, consider municipal bonds if you are in a higher tax bracket. Thinking about high-yield bonds for more interest, know that they tend to move with the stock market, so they are not a defensive position or a hedge on market downturns.

Taxes are a consideration. If you pay less in taxes, you keep more of your money. Tax planning can be short-sighted, meaning when doing 2019 taxes, investors look only at their current tax situation. Keep in mind, if you have $100,000 in a traditional IRA (the contributions all went in pre-tax) and are in a 20% tax bracket in retirement, you only have $80,000 of money to use in retirement. On the other hand, if you have invested in a Roth (contributions were taxable), the same $100,000 is worth $100,000 because no taxes are due on withdrawals. Be aware, in Pennsylvania we are lucky because the state does not tax retirement distributions. Some states do, so check before you move to another state on how it might reduce the income you receive in retirement. 

My suggestion before retirement is to diversify your taxes as well as your investments. A Roth is great, especially when you are young because you do not owe taxes on qualified withdrawals. Additionally, just a non-retirement account, either individual or joint, can be effective because capital gains are typically taxed at 15% on the gain, but anything taken from a traditional retirement account is taxed fully as income. As with taking advantage of any options, talk to your advisor and accountant.  Roth IRAs and traditional IRAs have limited availability depending on your income level and other factors. Remember, a Roth contribution may be available in your company’s retirement plan. 

With any plan, as with life, things change. Income changes, inheritances come and children go to college. Keep your accountant, advisor and sometimes your attorney apprised of major changes. This will make sure you are getting the most of your financial picture.  The more informed your experts are, the better they can help you.

Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.