By the time you hit retirement you should be able to kick up your feet, go on that vacation you’ve always wanted, or buy that dream house—not stress over your financial portfolio.
While there are many fantastic financial tools that can help ensure a fruitful retirement, there are also certain investments that may cause more stress than they are worth, says Christine Benz, Morningstar’s director of personal finance, during a recent interview.
Retirees should probably avoid both piggy banks and risky investments for savings.
Retirees should think twice before adding high risk investments like foreign-currency-denominated bonds, dedicated emerging-markets funds, and alternative type investments to their portfolios, Benz advises. (Although stashing money in a piggy bank is not the right move either — some risk may be necessary to provide adequate returns to fund retirement.)
Foreign Currency Bonds
“Bonds are loans, or IOUs, but you serve as the bank,” explains The Wall Street Journal. “You loan your money to a company, a city, the government – and they promise to pay you back in full, with regular interest payments. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts.”
But bonds can be riskier than other investments. Will the bond issuer make good on his or her payments?
“The safest of the safe are issued by the U.S. government, known as Treasurys; they’re backed by the ‘full faith and credit’ of the U.S. and are deemed virtually risk-free,” The Wall Street Journal says.
Foreign currency bonds, however, are bonds that are issued in a domestic market by a foreign entity, in the domestic market’s currency.
Foreign currency bonds tend to be more volatile, Benz says.
“The reason is that you hold bonds to act differently than your equity portfolio—when, in fact, foreign-currency-denominated bonds tend to have a lot more volatility than, say, core U.S.-dollar-denominated bonds,” she says. “So, you want to be careful before adding foreign-currency-denominated bonds.”
Emerging Market Funds
An emerging market is a country that has some characteristics of a developed market, but does not meet standards to be a developed market. And investing in companies from these emerging markets can be risky, Benz says, noting that these investments tend to be volatile and costly.
“Emerging-markets equities tend to be more volatile than stocks in more developed markets because of a variety of risk factors,” says Adam Zoll, assistant site editor with Morningstar.com, in a recent article. “These can include uncertain regulatory environments, currency fluctuations relative to the dollar, and volatility in commodity prices, which affects countries with economies based on natural-resources production.”
However, emerging market funds can also help to diversify your portfolio—you just need to choose the right businesses to invest in, financial experts agree.
“Whichever approach you prefer, the point is to go with investment vehicles run by pros who know how to navigate this very tricky segment of the market,” Zoll says. “You wouldn’t travel to another country without doing your research and making sure you will be in good hands. You probably shouldn’t invest that way either.”
Alternative Investments
An alternative investment is not one of the three traditional asset types—stocks, bonds and cash.
“Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity,” Investopedia says. “Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.”
Some investors may see alternative investments as a way to diversify their portfolio, but if investors already have core equity and core fixed income exposure, alternative funds may not give them much diversification, Benz says.
“If you’re looking at categories like long/short equity, for example — and that’s one of the categories where we’ve seen a lot of the inflows — what you tend to see is a performance pattern that falls somewhere between the stock and bond markets but much higher costs,” Benz says.”
Ultimately, working with a financial advisor is key to pursuing the investment strategy that is right for you.
“People often don’t know exactly what their goals are, but financial planners can help clients realize their dreams beginning in the initial meeting,” Founder and Principal at Las Vegas-based Belmore Financial, LLC Kate Holmes says. “Financial planning isn’t all about numbers and calculations. It’s about honest conversations, embracing what makes us happiest, and creating a plan to go after that.”
What Should I Consider for My Retirement Plan?
All that being said, it is possible that an alternative investment or a foreign bond is the right thing for you.
How you invest your savings for retirement requires a highly individualized answer — only after you have answered a lot more questions. How much money do you have? How much do you want to spend in retirement? Do you have other income sources? Do you want to leave an estate? How long will you live? How much will you need to spend on healthcare? And more….
Before investing your retirement savings, it is important to look at your overall retirement plan. And then develop an investment strategy that best suits your overall plan. The NewRetirement Retirement Calculator enables you to create this plan and provides resources for making the right investment decisions for you.
