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The Cloudy Journey Towards Retiring

Nick
Carroll
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Source: Unsplash, Katie Moum

A

drop in portfolio performance can lead one to consider selling stocks and mutual funds.  But is this the answer or is it your asset allocation need an assessment?

When it comes to retirement, the annual growth in your portfolio is fundamentally important.  It is vital to see these assets appreciate over time.  However, not all portfolios are created equal.  Some are riskier than others while others focus on key sectors and markets. 

As you get closer towards retiring, your portfolio needs to shift to more conservative investments.  Since equities (stocks) typically carry more risk, you'll find target funds slowly sell stocks and purchase more bonds. 

For example, what was once an allocation of 90% stocks and 10% bonds, your portfolio may be 60% stocks and 40% bonds.  This shift is essential to mitigate risk and reduce the chances of the entire portfolio being wiped out as seen during the financial crisis.

The shift is "Rebalancing" and every portfolio needs a rebalance annually to ensure it is meeting the investor's intent.  As your stocks climb and appreciate in value, your portfolio manager is hopefully selling those appreciated stocks and using the funds to purchase new undervalued stocks.

 

According to Charles R. Schwab's book, New Guide to Financial Independence, "As you examine this [portfolio], remember to look at your asset allocation for your entire portfolio-all of your money and investments - not just your IRA or your regular brokerage account.  Remember to include cash in bank checking and savings accounts as well." 

Perhaps your tax status has changed.  Perhaps your family has grown.  While every situation is different, it calls for you to pay attention to your portfolio. 

While cloudy and murky, the path towards retirement can be illuminated if you have a plan and track your progress.

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