There’s no one path to a successful retirement. However, there are some basic investment principles that will help people make sound decisions when saving for retirement. Some of the investment fundamentals that everyone should understand include:
Risk and return. The first basic principle of investment is the risk-return relationship, which states that higher risk increases the chances of higher gains. However, lower risks create a more stable portfolio. Every investor should know how much risk he or she can tolerate, and structure an investment program around that risk profile.
Time. Possibly the most important principle investors should understand is time. Starting to save for retirement sooner, rather than later, gives investors more time to allow investments to grow through compounding, and more time to “ride out” market ups and downs. Daily fluctuations are much less important when an investor doesn’t need to access investments for years.
Monitoring. While investors shouldn’t panic over daily market fluctuations, they should monitor their portfolios and make adjustments when necessary. Someone who is investing as part of an employer-sponsored 401(k) plan should review their portfolio at least once each year, and make appropriate changes. For example, as retirement approaches, the plan participant may want to shift more of his or her portfolio into lower-risk investments.
Diversify. Spreading financial assets across a range of investments is an effective way to reduce risk, and helps cushion your portfolio from possible market downturns, since the value of some investments may go up when others go down.
These investment principles can help plan participants create and maintain a well-diversified portfolio, helping them pursue their retirement goals. For more information about educating your plan participants about employer retirement plans, visit www.fiduciaryfirst.com or call FiduciaryFirst at 407-740-6111.