Ed. Note: The following is an excerpt from Retire in a Weekend! The Baby Boomers’ Guide to Making Work Optional. You can catch a sneak peek of the Bill's DVD, The 10 Biggest Mistakes People Make When Retiring & How YOU Can Avoid Them, at RetireinaWeekend.com.
So you want to retire early, huh?
What would you say if I told you that the return you earn on your money has little to do with your ability to pick good investments (security selection)?
What would you say if I told you that the return you earn on your money has little to do with knowing when to buy or sell certain investments (market timing)?
What would you say if I told you that the vast majority of the return you earn on your money can be attributed to how well you divide up your money among the major asset classes – stocks, bonds, and cash (asset allocation)?
When you realize that whether or not you achieve your retirement goals will depend, in large part, on how well you position your assets, you’d have to say it’s one of the most important decisions you’ll ever make. The ultimate goal, of course, is a secure retirement. How soon you retire, your expected rate of return, how much risk you take, how much money you can take out, and how long your money will last, are greatly affected by this one decision. As a result, I spend a tremendous amount of time on the asset allocation decision with my private clients.
Listen, to be a successful investor, you need to view investing in the context of risk. So rather than worrying about picking individual investments, the initial focus of your investment strategy should be on deciding how much you want to hold in stocks versus bonds, domestic versus international, value versus growth, and large-cap versus small cap. Notice how I didn’t mention anything about particular companies or sectors here?
Generally speaking, stocks are more volatile than bonds. Small cap stocks are more volatile than large caps. Growth stocks are more volatile than value. A domestic-only portfolio or an international-only will be riskier than a diversified portfolio that contains money in both. From year to year, no one, and I mean NO ONE, will be able to predict with any certainty what the best performing asset class will be. So, as a result, you’ll probably want to own a little bit of everything.
It’s important for you to see how the best and worst asset classes are constantly shifting and changing. As a bonus, check out a chart of Asset Class Returns for Key Indices on my site (pdf). This one-page color chart is simple and easy to understand, and it will illustrate how various asset classes have performed over the past 20 years.
Bill Losey, CFP®, CSA, America's Retirement Strategist®, is On The Money's the resident retirement planning expert. He has been named one of America’s Top Financial Planners and is the author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional. He also publishes Retirement Intelligence, a free weekly award-winning newsletter. Bill can be reached online at www.MyRetirementSuccess.com.