Spreading Your Risk In A Retirement Fund

Whatever type of retirement fund you have, be it 401k 403b, Roth IRA or plain old IRA, you want to spread your risk.

Stocks go up and go down. Treasuries and government backed bonds are very safe, but they also go up and down in value, although you will always get a reasonable return. You can lose your shirt in futures and commodities. Gold is attractive, too. So what should you do?

Most people start off with investing in mutual funds, or they rely on a professional adviser - by the way professional means that he gets paid for doing that job, so don't assume a professional adviser is an expert. Mutual funds generally invest in stocks, but it is certainly a good idea to have a proportion of your retirement fund invested in high-quality bonds - and the older you get the higher the quality you need.

Stocks can be risky

Recently, managers and investors alike have realised that markets do go up and go down, and so they have sought to diversify out of stocks, or in some cases out of the USA. Diversifying overseas is either risky - in new markets like China and Korea - or is a currency play. Why? because the leading markets in the USA, UK, Europe and Japan tend to move in the same cycles - and it is long term cycles that you need to watch for your retirement fund.

Hedging helps

An alternative is a hedge fund. But these are very risky. However, some of the leading mutual fund companies, like Fidelity and Vanguard, are now offering funds which has some hedging.

What is hedging? Hedging is betting with some of your money that the price will go down,and with some that the price will go up. Of course, you put more money where you think the market is going, and some against it. If the fund manager is right, the value goes up, and he is wrong it goes down a little. In the long run, a good manager, with good investment tools and research, can consistently make profits whatever the market does.

Therefore it is a good idea to have a small portion of your retirement fund in a fund that is involved in hedging in a conservative manner. This is a good way to get into commodities - any other way is far too risky unless you have money to throw away, and if you do, you won't be putting it into a retirement fund. Investing in hedged funds and commodities is not something to undertake on your own - you need to seek the advice of a good financial adviser.

Disclaimer

The information on this web site does not constitute an offer in any way. It gives general information, but is not financial advice. The aim is to help you decide what to do about your retirement plan, and the importance of saving for retirement. You should consult a retirement planning adviser with a proven record before setting up a retirement plan.