Getting There

Has anyone ever asked you how to get somewhere? Maybe it was to the local store, the next town, or for advice on one of life’s important decisions.

We are constantly asked by individual investors and 401(k) participants such questions as: How do I plan for a secure retirement? How do I determine my asset allocation? These are important investment planning questions that weigh heavily on the minds of many individual investors, and the answers are not simple.

However, the steps involved in getting the answers are very straightforward.

The answers might be: Invest early, put as much in stocks as you can emotionally stand (then double this amount and round up to 100 percent), live below your means, invest regularly and systematically, and ignore market volatility.

Granted, this is easier said than done. Follow this advice, check back when you’re 65, and you’ll be happy in retirement.

Although it really is that simple, let’s think through this a little further.

How do you get from here to there? We counsel investors to follow six simple steps.

Identify your life goals

List important things on a piece of paper and prioritize them. Goals might include a secure retirement, helping your children, funding your grandchildren’s education, caring for elderly parents or contributing to charity.

Understand your investor profile

This may be the most difficult step. You may think stocks are risky. So is running out of money in retirement. There are really only two types of risk that you can take — one current and one off in the distance. The current risk is that of being in the stock market, with all its volatility. The distant risk is running out of money. I’ve got plenty of money for retirement, you say.

Inflation may seem tame at around 3 percent or less annually, but if you retire at 55 to 65, you could conceivably live another 20 or 30 years. Even with inflation at 3 percent, consumer prices will double after about 23 years. Ouch!

Here’s a simple truth — stock markets go up and stock markets go down. Are there any guarantees in the market? Absolutely not. But this I do know: The only way to even have a chance at maintaining your real purchasing power is to be in stocks for the long term. Withdrawing 6 percent of your retirement portfolio annually with inflation at 3 percent, you’ve got to earn 9 percent just to stay even. Stocks have done about 11 percent annually, so you’re fine there, but just barely. With bonds — call them 6 percent annually — you’re way in the hole.

With money market funds at 3 percent historically, the game is over before it starts. So, you can embrace the risk of the stock market now, or you can accept the risk of outliving your retirement funds later. You cannot escape risk, but you can make intelligent decisions about which risk to take.

Develop your investment plan

The third step in any properly done investment-planning exercise is to develop your investment plan — one that is unique to you and you alone. This includes the following:

1) Identify income requirements. Do you require immediate and consistent income?

2) Identify asset growth necessary to maintain real purchasing power. Can you forgo income to concentrate on long-term wealth?

3) Identify liquidity needs. This is different from income requirements. Income requirements revolve around the regular income necessary to meet household expenditures. Liquidity needs center around a known and upcoming need for big-ticket items.

4) Think carefully about your time horizon. If you need all your money within a couple of years, you have a very different risk profile than someone who needs it in 30 years. You probably can’t afford a 50 percent market correction, while the person retiring in 30 years has both the future earning power and the necessary time to systematically recover.

5) Understand investment tax implications. The mutual fund with more than 200 percent annual turnover purchased in the fall may have huge capital gains implications.

Individual stocks, to a large degree, can be successfully tax-managed: You choose whether to sell or not. Not so with mutual funds.

Develop a written policy statement

I can’t stress enough the importance of this step. This will provide an historical record of your rational thought process at exactly the most important time you will need it — when the market is irrational! Develop a sound policy initially and don’t second-guess your decisions. Only review your investment policy when your circumstances change, not those of a finicky market. Remember, the market is a short-term voting machine. Sound investment decisions will last a lifetime.

Actively implement your plan

This reminds me of the Nike commercial — Just Do It! Procrastination costs you in countless ways. The longer you wait, the more you have to save to reach your goals. No one ever reaches his goals today by starting tomorrow.

Monitor your plan regularly

Once a year, thoroughly review your investment plan, progress and failures to date, changes in your own situation, and expectations about the future. Adjust your plan as necessary, but not as a knee-jerk reaction to the 6 o’clock news.

Again, sound investment decisions based on your unique requirements and a long-term-horizon is critical.

As they say, overnight success usually happens over many years. With proper planning, discipline, and advice, you can get there.

Glenn E. Atkins, CFA, is executive vice president and director of research at Garner Asset Management Co., a registered investment advisor in Fayetteville, providing investment counseling and portfolio management to individuals, retirement plans and institutions. He has written extensively on financial topics and has appeared as a guest lecturer at Harvard Business School.