Many near-retirement employees rely on 401(k) and I.R.A. plans, but a lot of these folks are wondering whether they should pull out their assets and invest in safer bets like bonds or mutual funds.
Financial writer Kerry Hannon advises otherwise.
“If you get out of equities, you’re in danger of missing the upturn when markets turn around,” she says in her most recent Forbes column.
“Your 401(k) contributions buy more shares of stocks when prices are lower, so when the markets come back, you’ll see a bigger bump.”
Hannon goes on to note the long-term security of stocks, as they have historically returned around 2.6% to 10.6% a year for 30-year periods. Bonds, on the other hand, return at best 7.4% and lose at worst 2.6% a year for the same 30-year period.
She also recommends that investment portfolios strike a 60-35-5 ratio of equities, bonds and cash reserves.
“The goal is to hold some investments that have the potential to rise, balanced by more secure, lower returning ones that can act as ballast.”
Finally, Hannon advises retiring investors to carefully analyze the performance of assets instead of jumping out of the equities game altogether – especially when the markets take a serious blow like in the past week.
“Use that opportunity to prune any holdings that no longer pass muster– and not due to a drop in the market, but rather poor performance overall.”