MAKE THE RIGHT CHOICE

The rapid growth of retirement-planning options such as 401(k)s, IRAs, and variable annuities has provided an ever-increasing variety of investment choices within each plan to save for retirement years. Yet, a number of reports show that an alarming number of today’s investors are oblivious to the importance of asset allocation in their retirement portfolios’ performance. This is despite the fact that financial advisors and the financial press have emphasized the asset allocation decision as critical to investment selection.

Market studies published in the Financial Analysts Journal in 1986 and updated recently show that how dollars are allocated among stocks, bonds and cash equivalents is the single most important decision an investor can make. In fact, according to the studies, security selection and market timing are far less important to a portfolio’s performance compared to the overall asset allocation.

Although these results have been widely publicized by the financial press and investment firms, a lot of retirement plan participants aren’t taking the message to heart. Company stocks and guaranteed investment contracts (GICs) still compose a bulk of the assets in the country’s defined contribution plans.

Company stock and GICs roughly constitute almost two-thirds of all retirement plan assets. Equities, the next most popular investment choice, composed less than a fifth of the portfolios. Bonds and cash equivalents represent the remainder of the assets. At first glance, one might suspect that plans are limiting the investment choices available to participants. However, this is not necessarily the case. Factors such as employee loyalty and familiarity account for the popularity of company stock.

On the other hand, GICs offer a fixed rate of return with a minimum of risk, thus making them attractive to investors who are understandably cautious about their retirement savings. However, placing too much money in GICs could limit an investor’s ability to achieve higher returns available from other investments and necessary to achieve retirement goals.

Employees also tend to stay put and never transfer their balances to other investment choices within their plan, even when new investment options may be added. Retirement planning is a process that needs to be periodically reviewed. This means updating asset allocations and taking advantage of new investment opportunities.

Given the variety of investment choices available, there is almost no legitimate reason to have a portfolio that is not properly diversified. Buying company stock develops an ownership interest in your company that can make work financially and personally rewarding. GICs can help you balance your portfolio with a fixed-income component. However, to really minimize risk and enhance your ability to achieve superior returns, a diversified portfolio is recommended.

Take the time to periodically review your asset allocation decision, preferably with the help of your financial advisor. If necessary, adjust your portfolio as your long-term plans change; most plans allow you to transfer your assets to different investment classes at least once a quarter. Remember, asset allocation is the most significant tool you have of making a real difference in your portfolio’s performance.