Optimistic figures about the stock market, such as a 29.32% increase (as of November 26, 2013) of broad market indexes and potential for the Dow Jones to hit 20,000 this year, have been tossed around like rice at a wedding. While these numbers have encouraged the average investor to return to stock investment it's important for retirement plan participants to keep a few things in mind.
Source: Carl Richards, The Behavior Gap.
While the short-term returns on stocks may have looked incredible on your third-quarter statements, you absolutely cannot invest based solely on short-term returns. Investors in 2008 likely saw the same incredibly high returns right before the market took a downward turn. All too often I overhear people saying, Wow, did you see returns are up to 20% on Fund XXX, I need to sell out of Fund YYY and buy in. Because the prices are being driven up, your hard-earned money actually buys fewer shares than if the prices were lower.
I m not saying that our economy is building up for a fall but it's important to keep in mind that, even while the market is doing well, you need to protect the nest egg that you ve worked so hard to build.
Regardless of the market, the key to investing your retirement assets is diversification. Financial advisors tell us that, by spreading the investments in a retirement account across different asset categories, investment risk can be greatly reduced. By investing in a mix of stocks and bonds you are creating your own small cushion of protection against losses in case of market fluctuation. It's important to remember that you re investing for the long term, and more than likely those incredible returns will only last for a short period of time.