Retirement: No need
to reinvent the wheel
to reinvent the wheel
By Ryan M. Lenox
For the participants in your retirement
plan, selecting the investments that will help them meet their
retirement goals, and maintaining the desired balance among the
various asset classes in their portfolios over time, can be a
daunting task.
Financial professionals have been making
these kinds of decisions for a long time there’s no
reason to ask your employees to reinvent the wheel. You may be
able to offer an investment selection and portfolio-balancing
service that works in conjunction with your current retirement
plan to simplify these sophisticated investment decisions.
An investment selection service can make
investing manageable for your plan participants by providing
pre-set portfolio models designed around a variety of risk
levels and investment goals.
Choosing investments based on an analysis
of the investor’s risk tolerance and investment goals is
a time-tested strategy. Using a disciplined approach to asset
allocation, an investor diversifies his or her investments by
spreading assets among an array of asset classes, such as
stocks, bonds and cash equivalents.
The purpose is to attempt to reduce the
effects of market fluctuations by balancing the characteristics
of the different asset classes. Because the asset categories do
not usually gain or lose value concurrently, including more
than one of them in a portfolio can reduce volatility over time
setbacks in one category can be offset with gains in another.
The importance of asset allocation has
been proven through all kinds of market conditions, good and
bad. In fact, one study in the Financial Analysts Journal
(May/June 1991) found that asset allocation, rather than market
timing, accounts for 90 percent of overall portfolio
performance.
Instead of starting from scratch, your
plan participants could use an investment selection and
rebalancing service to choose (and maintain) a portfolio model
that matches their individual investment profile, on a spectrum
ranging from conservative to aggressive. Each pre-set portfolio
would be appropriately divided among stocks, bonds and cash
equivalents intended to meet the specified investment goal
within the stated risk level.
For example, the conservative investor
might choose the portfolio that invests 35 percent of its
assets in cash and cash equivalents, 55 percent in fixed income
investments like bonds, and 10 percent in stocks. A moderate
investor might choose the portfolio that is 50 percent invested
in bonds and 50 percent in stocks, while an aggressive investor
might choose a portfolio that is 90 percent invested in stocks,
and only 10 percent in bonds.
Investing for retirement is naturally a
long-term proposition. If unattended over time, a retirement
portfolio can drift from its initial asset allocation and no
longer match a plan participant’s financial goals and
risk tolerance profile.
For example, if the stock portion of a
portfolio outperforms the bond portion, it won’t be long
before a greater percentage of assets than originally intended
are invested in stocks and a lesser percentage in bonds,
potentially increasing the portfolio’s risk level.
That’s why investing isn’t a
one-time decision. On a regular basis, your plan participants
should review their investments to determine whether the
original asset allocation balance is being maintained.
Again, this is another process that can be
automatically achieved through an investment selection service.
Even as markets move up and down, the service can automatically
rebalance and maintain a participant’s original asset
allocation. As a result, the level of investment risk they were
comfortable with when they made their initial investment
selections remains the same.
Rebalancing has also proven itself over
time. When compared to a buy and hold strategy in which the
original investments are not changed, rebalancing has been
shown to reduce volatility and provide better risk-adjusted
returns. (Merrill Lynch Advisory Study Rebalancing Analysis,
2000)
Some plan sponsors choose to make
retirement investing decisions even simpler by offering an
automatic enrollment capability. Employee pre-tax deferrals can
begin without requiring employees to submit a request to join
the plan as soon as they come eligible for the plan, unless
they opt out.
Talk with your financial advisor about
whether your retirement plan offers investment selections and
rebalancing service. It’s an option that can greatly
increase the appeal and effectiveness of your retirement plan.
Ryan Lenox is a Financial Advisor with
Merrill Lynch who specializes in helping his clients with
retirement planning, education planning, and investment
management. He can be reached by phone at 800-937-0257 X2266,
by mail at 8380 Old York Road, 4th Floor, Elkins Park, PA,
19027 or e-mail him at rlenox@pclient.ml.com.
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