Retirement Savings Tips: New Years Resolutions for 2006

By Scott Evans, Executive Vice President & Chief Investment Officer

Many of us start the New Year resolving to lose weight, eat healthier, or spend more time with family. In my case, all three apply this year. However, while we are working off that post holiday pouch on the treadmill, we should also resolve to get our long-term savings plan in order. The start of the year offers us each a fresh opportunity to take some simple steps to improve our chances of reaching our financial goals.

Make A Plan: Resolve to create an asset allocation plan for building an appropriate retirement savings portfolio.  This plan should include target percentages that you want to be invested in each of a broad range of asset classes.  Base the target percentages on your risk tolerance, savings goals, personal financial situation and the time period you have to invest - not by what the market may be doing at any moment in time. As you get closer to retirement this plan is likely to become more unique to your personal retirement goals.  There are online tools (like the one on tiaa-cref.org) that can help you develop an appropriate plan or you can consult with a financial advisor (Note that diversification is a technique to help reduce risk.  There is no absolute guarantee that diversification will protect against a loss of income.)
 
Diversify:  Resolve to invest your portfolio in a broad range of asset classes -- stocks, bonds, real estate and money market instruments -- as well as a broad set of investments within each class. Different assets will go up and down at different times, so a diversified portfolio can give you a smoother investment ride to retirement.

Re-balance:  Resolve to rebalance your portfolio on a regular basis - perhaps annually.  Remembering to readjust your holdings on your birthday or at the start of each new year will improve your ability to maintain the target allocations best suited to your situation, help keep you properly diversified and minimize the impact of unexpected bumps along the way. While it might sound easy, rebalancing actually requires a similar amount of will power you'll need for that diet you promised to go on. Since you will be buying when prices are falling and selling when prices are rising, your actions may be out of step with most of your neighbors

Don't chase yesterday's returns or buy-into "can't miss" investment strategies. Resolve to stick to your game plan and not be drawn to the sirens' calls of short-term blockbuster performance or "can't miss" investment strategies based on the conventional wisdom of the economic experts.

Many investors read too much into the short-term performance that's often reflected in "stars" and other fund ratings.  It's counterintuitive, but the fact is, when a fund has had blockbuster performance in a given year or two, you simply cannot -- and must not -- assume it will stay hot the following year.  Instead look for low-cost, pure and fully invested funds with consistent performance over time.  

Investors also tend to underestimate how risky it is to move their money into and out of certain asset classes or particular securities based on what the experts all think is going is happen. The term for this activity is market timing and long-term investors would be wise to avoid engaging in it. Last year for example the conventional wisdom was that the dollar would continue to decline, but it actually rallied and ended the year up against the euro and the yen. The crystal ball can be cloudy for even for the brightest economists and placing bets based on their prognostications can be costly.

So while others might try to make successful saving sound more complex, the reality is that a few simple steps can matter most.  Make a plan, diversify, rebalance and avoid chasing yesterday's returns or buying-into the latest "can't miss" investment strategy. 

Like the advice to avoid eggnog and cookies, this is all stuff we already know. But, if you listened to your diet conscience as well as I did during the holidays, you will have many, many hours of treadmill time to work on that savings plan.

Happy New Year!