Retirement Plans – Managing Risk with Safe Investments

The chaos in the market and overall economy has left a lot of people worried and confused. People are extremely eager for information and investment advice. I can’t tell you how many people have asked me “what should I do with my retirement accounts?” Sell? Hold? Buy More? To that, I’d say take step back and think for a bit. If you’re still holding most of your investments, there isn’t the downside risk that existed a year ago. So the good news is you have some time. You can still take control of your retirement plans by adding some safe investments to your asset allocation and that will help in managing risk in your portfolio.

Managing risk in your retirement plans

The answer to the question will lie in your personal situation and where you’re at in your life. If you have a low risk tolerance, its important that you don’t own things that will keep you up at night. You are best served to sit in cash or low risk investments or at least make some of these cash equivalents a part of your asset allocation to aid in managing risk in your portfolio. Although cash isn’t yielding a whole lot, the good news is that it is easier than ever to invest in bonds. Bond funds, and specifically exchange-traded funds (ETFs) have made the process very easy. Vanguard has a great group of ETFs with very low costs which I would recommend. The Vanguard Total Bond Market ETF (Symbol BND) is an excellent fund if you’re looking for a simple, diversified bond investment. The fund pays monthly dividends, yields 4.64%, and has an expense ratio of 0.11%. You can buy this fund right through your brokerage, for the same price as any stock. Also, if its inflation you are worried about, you can take a look at Inflation-Protected Securities, or TIPS. Their yield is determined by the CPI, and pays out corresponding to increases in that. ishares has an ETF to buy these securities (Symbol TIP).

Manage Risk with Diversification

If you have a little higher appetite for risk, or have awhile until you retire, you’re probably best served getting into some stocks. Quality blue-chip stocks historically have outpaced inflation, and have provided the best overall return. This doesn’t mean you have to buy Citigroup stock and watch CNBC 24/7 to make sure the company is still afloat. Here, diversification is the key to managing risk in your stock investments. The easiest way to do this is again through funds. For example Vanguard’s Total Stock Market ETF (Symbol VTI) will do the trick. It owns the largest 1,300 in the U.S., and yields 4.26%. The expense ratio is 0.07%. Don’t overlook the value of low costs when looking to funds, and Vanguard does the best job of that. Holding investments like this for the long term is one of the best, most stable ways to save for retirement.

With the market experiencing unprecedented volatility, these types of investments can offer stability to the average investor who doesn’t need to be concerned with daily market fluctuations. If you’re looking to get your retirement plans back on track, I’d take a look at these funds.

Disclosure: Author owns BND.