Loss aversion is an observation that the pain we experience from a loss is twice as great as the pleasure from an equivalent gain.
With a retirement that could last 30+ years, it is important to consider the impact that a sequence of negative investment returns early on can have on the longevity of your nest egg. Awareness of this risk allows you to develop a strategy to attempt to mitigate this risk during the years surrounding your retirement.
Although longevity risk can pose a serious threat to your retirement plans, its impact can be mitigated with prudent planning and using reasonable assumptions for how long you and your spouse may live.
Diversification can only lower your risk to a certain extent, regardless of the number of investments you own. However, what does not decrease, as your holdings increase is complexity.
Often, adding complexity (your portfolio) on top of complexity (the markets) can increase risks rather than reduce them.
The company-specific risk that comes with concentrated holdings can be mitigated through diversification. However, the process of selling can have many nuances. Having a diversification strategy in place could be useful when making investment decisions with tax and emotional implications.
Some of these retirement milestones create potential planning opportunities to boost savings, maximize retirement income, or improve tax efficiency. Others mark deadlines that could result in stiff penalties if overlooked.
A successful retirement investment strategy does not require great genius nor tremendous effort, but it does require you to stick with that strategy in good times and bad.
Developing and adhering to a sound investment strategy is essential in retirement. This strategy will likely look different than the one you used during your accumulation years. You must find a balance between today’s spending needs and those of the future if you plan on maintaining your standard of living throughout retirement.
Inflation is yet another risk you may face in retirement, though its effects may not be felt for many years. With smart planning and prudent investing, there are ways to attempt to mitigate its effects on your purchasing power.
Putting your investing on autopilot is often a useful strategy when you are accumulating assets, but as you approach retirement, your portfolio could likely benefit from regular monitoring and these adjustments.