Daily Gains Letter

When It Comes to Retirement, Investors Need to Focus on This Little Four-Letter Word

By for Daily Gains Letter |

Investors Need to Focus on This Little Four-Letter Word“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”

Mr. Speculator is right about one thing: to gain more you have to risk more.

However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.

When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.

Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:

10-Year Treasury Note Chart

Chart courtesy of www.StockCharts.com

The yields have increased roughly 75% since the beginning of May.

Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the market. (Source: “Historical Flow Data,” Investment Company Institute web site, August 14, 2013.)

Keeping all this in mind, should an investor who is looking to enter the world of investing follow in the footsteps of Mr. Speculator? Should they go all in into the bond market, and take risks because bond prices have come down, creating value?

The answer to both these questions is “no.”

Investors should never invest their entire nest in one asset class. The bond market, as it stands, still faces many risks.

Low interest rates have caused bond prices to soar, and on top of that, the quantitative easing has also lured in more investors. Now, things are looking to turn. Investors in the bond market are expecting a turnaround or higher interest rates ahead—which is bad for bonds.

The downside risks in the bond market are many, but the upside potential isn’t very strong. Instead of going with the bond market and speculating it will increase in value, investors may want to look at exchange-traded funds (ETFs) like the ProShares Short 20+ Year Treasury (NYSEArca/TBF). This ETF lets investors short bonds that have a maturity of longer than 20 years.

If long-term investors manage their risk properly, they can earn higher returns as well. Speculating is not for everyone, and investors should never put their retirement savings on the line.

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