Is there such a thing as the “perfect investment”?
When it comes to planning for retirement, financial professionals often advise that the two smartest moves individuals can make are to:
If you review your retirement account statement when you receive it, you may have noticed that the performance of your investments tends to vary—one quarter, one investment may be up; the next, it may be down.
Many people mistakenly believe that if they could just pick the "right" investment, they would be all set. So what's the problem? Unfortunately, when it comes to choosing retirement investments, there is no one right answer.
How Market Conditions Affect Investments
You may already know that different kinds of investments generally react differently to varying market conditions—and that historically, investments of all types move in cycles. Take a look at the chart below; it shows the annual rates of return from 2000-2009 for six major investment categories. Can you identify any patterns?
We couldn't either...because there aren't any!
For example, at the beginning of 2003, someone looking for "the" place to invest might have only considered fixed income because it had high returns from 2000 through 2002. But then fixed income investments performed significantly lower than many other investments from 2003 through 2006, only to rebound in 2007. So as you can see, investments that may be high performers for one or two years can easily underperform the next year—all due to ever-changing market conditions.
Choosing Investments that Work for You
Constant changes in market conditions don't have to keep you from potentially realizing your retirement goals. If you're like many who are planning for retirement, you may wish to take advantage of two investment concepts—asset allocation and diversification—to help yourself "balance" the fact that some investment options sometimes perform well while others, for a time, may not be doing well at all.
Asset allocation and diversification often work in tandem to help you manage the risk you might otherwise face if you held only one type of investment in one asset class.
How do asset allocation & diversification work?
Please keep in mind, application of asset allocation and diversification concepts does not ensure a profit or protect against loss in a declining market. It is possible to lose money by investing in securities.
Keeping It All in Perspective
Here are some important tips to keep in mind when selecting the investments for your retirement account:
To learn more about the benefits of asset allocation, take the online course "How to Choose Investments."