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No one will look after your money the way you can. After all, it is your future that is at stake. Even if you decide to work with a financial adviser, you need to be able to understand the investments he or she recommends and be able to recognize whether they are right for you.
Whether you participate in a 401(k) plan and must choose your investments, or you want to take the plunge into retirement investing, the questions are where should you start, how much should you contribute and what should you invest it in? Like almost everything else in life, it depends.
Your investment strategy will depend upon:
- How much time you have until you'll need the money. If you have 20 or more years to go, you can afford to take more risk than someone facing retirement next year. That's because, theoretically at least, you have more time to ride out the ups and downs in the market.
- What your risk tolerance is. Risk tolerance refers to how much risk you are willing to take. Be careful of being at one extreme or the other. If you are too afraid of taking risks, your money won't grow and you may not have enough in retirement. If you take foolish risks, you can end up in the same boat, with too little saved at retirement.
- What the rest of your retirement plan looks like. Will you be selling your home and buying something less costly? Lower expenses mean you need less in savings and investments.
- What your other financial opportunities are once you retire, be it rental property, inheritance or a part-time job once you retire.
- What kind of shape you're in. If you are in great shape and have a long line of healthy ancestors, you might need the money for a lot longer than someone with a less fortunate family history. You also may be able to work longer.
Get smart
A little time spent learning basic financial strategies can go a long way toward making you more confident—and richer. Just don't try to digest everything at once. Pick a single topic that's of most interest, or of the greatest urgency, and start there. (Don't be surprised to discover that the experts routinely disagree on some points!)
Your employer may offer literature, seminars and even software to help you put together your investment portfolios. Take advantage of them! Community colleges also offer courses on investing, and the instructors in these courses are not allowed to use them as a sales pitch (unlike investment "seminars" you may see advertised in the newspaper). Spending a few hours a week taking an investment course could pay off handsomely in the long run.
Tip: If you are married, and one of you normally "takes care" of the investment decisions, make sure you both start learning. Otherwise, what will happen if the decision maker no longer is around?
Stocks
Stocks simply are partial ownership in a company. When you buy stock, you are investing in a company. The best reason to invest in a stock is because you believe in the company, its product and management and its ability to make money. When a company does well, the stock price goes up and the company may distribute a portion of its profits to shareholders by paying a dividend. And the worst reason to buy a stock? Just because of a "hot tip."
Tip: To learn more about investing in stocks, contact the National Association of Investors Corp. at 877-275-6242. The NAIC, a nonprofit organization, assists both investors and investment clubs.
Stock options. Some companies give employees incentives to buy company stock through a stock option plan, not as part of a retirement plan. Stock options give you the right to buy a certain number of shares of company stock, generally anytime during the next 10 years, at an attractive price (the option "strike price" or "grant price"). What you hope will happen is that the price of the stock will rise, and you can "exercise" your option. In other words, you want to buy (low) at the strike price and sell (high) at the exercise price.
Stock options can be a great way to increase your wealth. But like any investment, they do carry a risk. You are able to reduce your risk when you buy at an attractive price, but don't lose sight of the big picture. Remember to diversify your investments.
The National Center for Employee Ownership has helpful information on stock options. Contact them at 1736 Franklin St., 8th Floor, Oakland, CA 94612-3445; 510-208-1300; www.nceo.org.
Tip: Be very careful about tying too much of your future to your employer's future, or any company's future. An increasing number of employers provide their match for a 401(k) plan in the form of company stock. Other companies have Employee Stock Ownership Plans (ESOPs), which give employees stock as part, or even all, of their retirement plan.
If your employer already is providing some company stock as part of its contribution to your retirement, then you probably would be better off diversifying and choosing other investment options. And if your employer provides only company stock as your retirement plan, maximize your other opportunities to save for retirement.
Mutual funds. Many employees are given the choice of investing in mutual funds in their 401(k) plans. You also can invest in mutual funds through an IRA or outside a retirement account.
With a mutual fund, you simply pool your money with other investors and invest with a certain objective (maximum growth, for example, or steady income). The manager of the fund, which could be an individual or a team, is responsible for investing the money to meet the fund's objectives. Some do a better job of that than others. Mutual funds usually are very diversified, which means they invest in a wide variety of stocks and other investments.
To research a mutual fund, you can read the "prospectus" that the fund is required to provide you upon request. Unless you are a serious investor, though, a lot of it likely will go over your head. So after you read the prospectus, go to the library and look at Morningstar for an independent assessment of how the various funds have performed. You also can use Morningstar to find funds in which you may want to invest IRA or other retirement money.
Socially-responsible funds. As you investigate fund options, you also may consider a mutual fund that invests only in companies that meet certain ethical and moral standards—e.g., funds that invest only in environmentally conscious companies ("green funds") or those that support union members. The IAM Shares Fund, for example, is a mutual fund that invests in IAM-represented companies, to help keep them strong and to provide greater job security for IAM members.
Before you invest in a fund, you should:
- Investigate the fees and expenses that they may charge;
- Review the consistency of the fund's returns over time; and
- Determine how long the fund holds the stocks it buys (it should have a relatively low turnover rate).
Corporate greed
Make sure that your values are reflected in the mutual fund companies in which you invest. The AFL-CIO lists some of the best Web sites to use to investigate corporations violating workers' rights.
Also, a new report by AFSCME and the Corporate Library identifies those mutual fund companies that have been enabling companies to offer extravagant CEO salaries. You can read the report here.
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