QUESTION: SHOULD I OWN STOCKS IN MY RETIREMENT PLAN
The US and foreign stock markets have been tremendously volatile the past few years. Many people are asking if stocks are still a solid choice for retirement savings. The answer is yes…but.
One of the principal characteristics of a well thought out retirement plan is a long term outlook For most people planning for retirement is a long term goal which cannot be met by making short term investment decisions. Ideally, those decisions should be made on the basis of defined objectives, should be proactive rather than reactive…and such a plan should include stocks as a part of a diversified investment portfolio.
There are a number of different asset classes available to construct a portfolio. Fundamental allocations consist of stocks, bonds and cash. Stocks are further broken down into domestic and international. Domestic stocks include large, medium and small companies; growth and value, and specific sectors such as energy, real estate, finance and utilities. International stocks are divided between developed and emerging market countries, with both further divided similarly to domestic stocks. The various categories of stocks can and do perform differently in varying economic and market conditions. The key to stock investing in good times and bad is selecting the right allocation to best match up with the current conditions, and then make appropriate adjustment based on changes in the economy and markets.
It is normally a very bad idea to get out of stocks entirely. As previously mentioned, even in challenging markets some categories of stocks will perform better than others. And, the statistics are clear that those investors who pull out of the market entirely will miss out on much of the rebound when it happens. Getting out of the market has always been the second hardest decision to make; getting back in is the hardest!
The only circumstance when it might make sense to be out of stocks entirely is if the investment window is very short. For example, a person retires with a benefit, knowing they will need much of it for a specific purpose in two or three years. With that short of a window it really doesn’t make sense to invest in stocks. Market cycles tend to be that long or longer, so it is very possible that it might be necessary to cash out at the down end of a cycle, at a loss.
Successful retirement investing requires a goal, planning and a longer term outlook. With those three things in place it absolutely makes sense to include stocks in your portfolio. Daryl Craft August 2, 2012