A Late-Starter's Guide to Saving for Retirement |
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Investing for the Highest Possible Return
Once you get your savings plan in gear, invest for the highest possible return appropriate for your time horizon. Keep in mind that the highest return asset classes are also the most volatile; if you want those high returns, you must be able to wait through the down years.
For example, Hong Kong stocks have produced outstanding returns over the past 50 years. Yet there have been many periods when prices dropped by 30 percent and more. If your retirement date is three years away, you cannot risk losing 30 percent. If you have 15 years until retirement, Hong Kong stocks may be a good choice as the up years can be expected to far outperform the down years. To maximize your investments, consider these assets according to your timeframe:
- Five Years or Less: The best investments for a period of five years or less are medium-term Treasury bonds and other government-guaranteed, fixed-income securities, as well as high-yielding real estate investment trusts, and high-yielding utility stocks.
- Five to 10 Years: Look at large-cap U.S. stocks, real estate and corporate bonds of BBB grade or higher.
- Longer than 10 Years: Small cap U.S. stocks, foreign and emerging market stocks, sector funds, and highly-leveraged real estate are appropriate.
Don't forget that when investing for retirement, you need to invest not just from now until your retirement date, but from now until the end of your life. Furthermore, you may have within your investment goals both short-term and long-term objectives. For example, you might want to fund both the pay-off of your mortgage in five years and a new car next year at the same time as you are funding your retirement in 10 years and moving to a retirement community in 20 years. For most people, a mix of short-term and long-term investments is appropriate.
Next: Factoring in Market Conditions
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