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Don’t Open That Envelope!

January 1, 2012

One day your up, the next your down. Over time you should be more up than down.

Do not open that envelope. It is tempting and even seems like a good thing to do, but beware of what it contains. What you read in that envelope could cause you to make bad decisions that could affect your retirement.
What envelope am I talking about? Is it the latest 10 credit card offers you’ve received? No, it is the quarterly retirement statement you probably received in October.
Why is it dangerous to look at this envelope? The No. 1 reason is it gets your emotions involved in investing. When the stock market continually goes up, this can really excite you, but over the past couple of months it can be very depressing.
My last quarterly update showed a decrease of 18 percent. I guess the only good thing is I’ve only been in the workforce for about 11 years to I do not have a huge nest egg. However it still is hard to not get depressed when I see how much money I have lost.
I would bet it was the last straw for some people. They have seen their investments struggle the past couple of years that the latest movements in the market was enough to push them over the edge. So, they took their retirement out of stocks and mutual funds into a safer investment.
How did that work out? In October, the stock market was up around 15 percent. Many who invest based on emotion see this and decide to get back in the market. They usually arrive just in time as the rally has run out of steam and the market continues to slide. They see their loses so they get out of the market just as it has hit bottom and miss the next ride up. Investing on emotion will continually cause you to buy high and sell low.
If you are investing for something more than 10 years away, then history shows us the stock market is the place where an individual can find the best growth. The market will go up and down, but over time it consistently averages around 10 percent. By finding a mutual fund that tries to mimic the overall market an investor pays low fees and has a mutual fund that will beat most other mutual funds over a long time period.
If you have been investing for a long time for retirement or a college education, you need to start shifting your investments from stocks to safer investments that usually consists of bonds and money market accounts. At this point growth is not nearly as important as preservation of your money. So although you will not look at your retirement fund every quarter, it still is a good idea to examine it at least once a year to make sure you have the right risk level for your age and investment goals.
It is becoming even easier for this rebalancing to take place. Many mutual fund companies now offer target date retirement funds. These funds gather a collection of other mutual funds, so it is a fund of funds. If you have a long time until you need the money, the mutual funds the target date retirement contains are heavily weighted toward stocks.
As you get older and closer to your goal, the target date fund reallocates your fund to make it safer by slowly switching stock funds to bond funds. It has done the work of rebalancing for you.
So there it is. The next time you get that retirement fund quarterly update in the mail, do not spend a lot of time on it. If it was a bad quarter, like this past one, it can cause you to make decisions that will hurt your future investments. If it was a good quarter, it may get you too confident and cause you to live a little better than you should. In a good or bad quarter this quarterly statement can do bad things to your financial future. My advice for the next quarterly report you receive in January is to use it for kindling for your fireplace.

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