Starting to contribute to a retirement account, or multiple retirement accounts, is an important part of planning for retirement, but it isn't the only step in the process. Saving for retirement may not be enough if you aren’t choosing the right kinds of investments.
Choosing your investment options in a 401(k) or IRA can be a challenge. Having an investment plan will help you decide which options will let you reach retirement age with enough savings to stop working, support your lifestyle, and pay for healthcare as you age.
Understand Your Investor Personality
Every investor needs a plan that takes into account your:
- Savings goals
- Other sources of income
- Level of risk tolerance
- Investing personality
Understanding these factors will help you select which types of retirement accounts to invest in and how to manage your investments. Will you be a hands-on investor, involved in the day-to-day management of your accounts, or do you prefer a hands-off approach to investing?
To decide what type of investor you will be (or want to be right now), ask yourself:
- How do you like to make decisions?
- Do you take advice or prefer to do it yourself?
- How do you respond to obstacles, such as a market downturn?
- What level of tolerance do you have for risk?
- How emotional are you about making short- or long-term decisions?
There are no right or wrong answers to these questions, but understanding how you make decisions, respond to pressure, and manage the emotional aspect of decision-making will inform how involved you should be in the day-to-day management of your investment portfolio.
What It Takes to Be a Hands-on Investor
Hands-on investors want to be involved in designing their ideal investment portfolio. They are generally knowledgeable about different investment options, such as individual stocks, mutual funds, or exchange-traded funds (ETFs). They either know, or are willing to learn, how to set target allocation weights for different asset classes, including stocks, bonds, cash, and real assets.
Hands-on investors regularly monitor and re-balance their investment portfolio. They also understand how to create a portfolio that maximizes tax benefits and shifts levels of risk as they near retirement.
If you're a hands-on investor, you probably want to:
- Monitor and review account performance
- Complete routine fee-analysis
- Customize investment allocations
- Research the details of individuals stocks, mutual funds, ETFs, or other investments
- Create a tax-efficient portfolio
- Rebalance investments on a routine basis
There are many options for do-it-yourself investors, including:
- Self-directed retirement accounts
- Discount brokerage firms
- Low-fee financial services firms
These types of accounts give you the option to invest on your own, with or without the aid of an advisor.
What It Takes to Be a Hands-off Investor
Hands-off investors are typically looking for a simple investment solution. They may be less familiar with the structure of individuals stocks, mutual funds, ETFs, or other investments. As a result, hands-off investors are more likely to seek out pre-mixed asset allocation portfolios.
These investment alternatives rely on professional guidance to set the investment portfolio strategy and automatically re-balance. This approach suits those who prefer a "set it and forget it" approach to managing an investment portfolio or those who plan to make infrequent changes.
Asset allocation is how you divide your account across asset classes like stocks, bonds, real assets, and cash.
For the hands-off investor, consider using a low-cost, passive investment strategy that focuses on asset allocation. This will usually work better than just trying to pick the top performers from previous years or dividing your contributions across each one of your investment options in a 401(k) plan.
If you're a hands-off investor, you're likely more comfortable:
- Not checking your accounts on a regular basis
- Not choosing your own investments
- Using a pre-mixed portfolio or target-date funds
- Limiting asset allocation updates or changes
- Only rebalancing your accounts occasionally
- Working with an advisor
Popular options for hands-off investors include:
- Target-date retirement funds
- Asset allocation funds
- Professionally managed portfolios
- Online investment platforms or robo-advisors
- Passively managed index mutual funds
These options do not require regular monitoring, as someone else manages them and adjusts them based on market performance. Target-date funds are particularly popular because they automatically adjust to become more conservatively invested as you approach retirement.
Using a Financial Advisor
Both hands-on and hands-off investors can benefit from working with a financial advisor. These professionals can help you manage your investment options and understand how those investments fit into your bigger financial picture.
If you prefer having a financial coach, consider working with a fee-only certified financial planner. These professionals are paid only by clients and not by commissions or brokerage fees.
Many employers and banks also offer free or discounted financial wellness programs or sessions with a financial advisor. These programs can help you manage your investments, savings, spending, budgeting, and more to create a healthy financial life both now and in the future.
Both hands-on and hands-off investors should also have an investment policy statement (IPS) as a strategic guide to their investment program.