By Claire Wood
If you have read or seen any economic news in the past few months, you may have been inundated with words like “recession,” or “bear market.” Coming out of a global pandemic, the United States economy has experienced many devastating effects due to ongoing issues with the housing market, supply chain problems, inflation on nearly everything from fuel to groceries, and changes in workforce patterns.
It is because of these historic challenges that many people are wondering if now is a good time to take their money out of the stock market, or, at a minimum, discontinue their contributions while the market is down. Investment experts who urge investors to play the long game might argue that you should stay the course, keep your money where it is while the economy rebounds, and keep contributing while shares are basically on sale at lower than usual prices.
Whether you are a seasoned investor or if you are simply looking to get started with beefing up your retirement accounts, one concept that it is vital to be clear on is asset allocation.
Investopedia defines asset allocation as, “The process of deciding where to put money to work in the market. It aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.”
To break this definition down even further, it is important to delve deeply into your own retirement plans and strategies.
For some military members and their families, they are heavily relying upon the pension program set forth by the federal government upon completing a set number of years of service. Whether a servicemember chooses the Blended Retirement System (BRS) or the Legacy High-3 (High-36) System, many find that these retirement amounts alone are not monetarily sufficient to meet or sustain future retirement plans.
In addition to military retirement, many people choose to additionally contribute through the Thrift Savings Plan, a 401(k) program for federal employees where their contributions are invested into the market into a variety of funds depending on your strategy. Other popular brokerages for mutual fund investing companies outside of government based programs include Fidelity, Schwab, T.D. Ameritrade, and Vanguard.
No matter the asset management company, most of these fund categories include: equity, aggressive growth, growth, balanced, income-growth, and fixed income. These funds can either be self-managed or managed by trained and credentialed investing professionals who generally take a small fee for their services.
Before investing any of your hard-earned dollars into any retirement account, your wisest investment will be educating yourself on what each particular company or brokerage offers in terms of services, what fees or taxes will be due on your accounts, and how to access your money when you need it.
For those using investment services like the ones offered through AAFMAA Wealth Management and Trust LLC,* you will need to consider two major factors in setting up your asset allocation: (1) What is your time horizon for using this money? and, (2) What is your ability to tolerate risk?
The answers to these questions are unique and deeply personal depending on a variety of factors. On time horizon, Investor.gov shares, “Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our markets. By contrast, an investor saving up for a teenager’s college education would likely take on less risk because he or she has a shorter time horizon.”
Regarding risk tolerance, Investor.gov continues, “Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment.”
Understanding all facets of your personal time horizon and risk tolerance will then determine how you choose to diversify your investments, generally among the three broad categories of stocks, bonds, and cash.
If you are unsure of where your potential retirement goals and plans are aligning or if you would like to get a better understanding of how to appropriately mix your asset allocation, there are many available tools to utilize.
The U.S. Securities and Exchange Commission offers a variety of free financial calculators and tools like their Compound Interest and Savings Goals Calculator, their Social Security Retirement Estimator, their Retirement Ballpark Estimator, and their Mutual Fund Analyzer. Also, it’s a smart move to search any potential investment professionals you may use with their background, licensing, and registration database that is connected to the Investor Adviser Public Disclosure (IAPD) website.
Additionally, AAFMAA offers current and retired military members and surviving spouses investment management services. Relationship managers can help you investigate your investment management processes, philosophies, and costs.
Investment management and asset allocation involves an ongoing process of understanding your financial goals, determining your optimum portfolio, and then monitoring and adjusting as necessary over time. Be sure to connect with a financial professional you trust to help you address for own personal needs and future outcomes.
*Financial Planning, Investment Management, and Trust Services provided by AAFMAA Wealth Management & Trust, a North Carolina Limited Liability Company wholly owned by AAFMAA. Physical address: 639 Executive Place, Suite 200, Fayetteville, NC 28305. Information provided by AAFMAA Wealth Management & Trust LLC is not intended to be tax or legal advice and we encourage you to seek guidance from your tax and legal advisors. Past performance does not guarantee future results. Investments are not FDIC or SIPC insured, are not deposits, nor are they insured by, issued by, or guaranteed by obligations of any government agency or any bank, and they involve risk including possible loss of principal.
Claire Wood is a military spouse who calls home anywhere the Army sends her. She loves reading, hosting friends, and keeping houseplants alive. She shares on Instagram @home_sweet_military_home and her 2015 book, Mission Ready Marriage is available on Amazon.