By Deborah Nayrocker
Dear Deborah: My employer is planning on ending its defined benefit program soon and switching to a defined contribution program. I’m apprehensive about being responsible for my own investments. I watched family members lose money in Internet stocks and other investments and I want to avoid that. What should I be aware of when making investment decisions? — A Reader
Answer: By having a sound plan, you can ignore the fads, stop following the herds of investors, and stop trying to beat the market. Just focus on your long-term investment goal. You can sleep better at night if you don’t have your emotions driving your investment decisions.
Find out about your options in your employer-sponsored retirement plan. To get the right mix of investments, you’ll want to talk about your options with your employer’s financial advisor. Consider your risk profile when investing.
Aim for a diversified balanced portfolio. Diversifying doesn’t mean owning a dozen or more funds. Holding a total stock market index fund and a total bond market index fund provides diversification. Holding a target retirement fund—which is a mixture of balanced (stocks and bonds) mutual funds—helps reduce risk.
Look for low-cost index funds. “Indexing wins whether markets are efficient or inefficient,” says John Bogle, Vanguard founder (Money). Investment fees can make a big difference over time so keep them as low as you can.
Asset allocation is important, but it shouldn’t be your only concern. Your asset location is also important. That is, investments you have in tax-deferred accounts and taxable accounts. Try not to put all your investments in tax-deferred accounts. It’s possible that taxes could be higher in the future.
Deborah Nayrocker is an author and columnist. She is the award-winning author of The Art of Debt-Free Living and Living a Balanced Financial Life.
Copyright by Deborah J. Nayrocker. All rights reserved.