You are here

Consider Time a Good Retirement Investment

A famous business adage is “time is money.” In retirement, it may also be valid to say, “money is time.” After all, retirement is a transition from spending time making money to spending money to make the most of your time.

However, as you plan to draw down income from your investment portfolio, you might find yourself focusing more on money than on time, which can affect how you invest.

For instance, some retirement investors, perhaps influenced by the latest headlines, actively modify their portfolios and end up making emotional investment decisions. Instead, focusing a little more time on the things you can control and that really matter – your financial goals – instead of market swings may help you better invest for retirement in the long run.

DIY or adviser?

Consider that the average investor has a poor track record managing investments. Dalbar, a research company, found the average investor trailed the S&P 500 by more than 4% over a 20-year period. The primary reason cited for the disparity cited was investors’ penchant for chasing returns.

There’s nothing inherently wrong with becoming a do-it-yourself investor. The proliferation of online brokers has made it easier for people to open accounts and invest on their own. Some retirees may find their available time an opportunity to learn to invest on their own.

On the other hand, many retirees simply find they don’t want to dedicate the time or take on the responsibility of managing their portfolio, especially if they feel they lack the financial know-how.

Additionally, retirement investing takes more than just trying to grow wealth. For example, retirees need to create a sustainable withdrawal strategy and understand how to take annual RMDs. Thus, retirement investors may find the services of an investment adviser essential.

Active or passive?

Giving time a bigger role as you invest for retirement begins with your strategy. Generally, that means deciding whether to be an active or passive investor.

Active investing entails consistently buying and selling individual securities or mutual funds controlled by a fund manager. Typically, active investors monitor the day-to-day performance of the market, research companies and industry sectors and trade frequently. All this time managing a portfolio is an attempt to predict the future.

Conversely, passive investing is a strategy in which investors buy and hold investments for long periods of time. It has become associated with market-tracking index funds and exchange-traded funds (ETFs). Therefore, as a passive investor, you are usually seeking to capture the long-term returns of the market rather than trying to beat it, which doesn’t require the same time-consuming pursuits of active investing.

Research shows active investors have a high probability of underperforming the market. While some active managers may succeed in certain years, they tend to underperform the market over time, according to the S&P Dow Jones Indices Versus Active scorecard. Over a five-year period ending on December 31, 2013, active managers in all 18 stock fund categories studied failed to outperform their benchmarks.

Let your money spend time in the market

As a retirement investor you may benefit more from concentrating on your daily activities while just letting your investments spend time in the market.

In a Vanguard study of the S&P 500, missing just the 20 best trading days from 1928 through 2008 would have resulted in nearly half the return (2.6%) you would have earned had you stayed invested for all trading days (5.0%). By spending time out of the market you risk missing out on valuable rallies. Retirement investors may be better off holding a broadly diversified portfolio, which can help reduce risk by providing exposure to different asset classes that can go up and down at different times.

Limit your time with financial news

Another harmful money-oriented approach is becoming consumed by financial media.

From several 24-hour financial news channels to countless financial blogs, you have access to more than a lifetime of financial information. But remember, these sources predominantly cover short-term trends. The stories change every day and none of them may have any bearing on your portfolio.

When it comes to financial information you are better served with materials that focus on the major topics of investing, from asset allocation to portfolio construction, based on years of research. In fact, if you tried to invest according to what you hear in the financial media, you’re liable to get negative results. In their 2010 study, “Behavioral Portfolio Analysis of Individual Investors,” researchers Arvid Hoffmann, Hersh Shefrin and Joost Pennings found investors that relied on “financial news, intuition and professional advice” earned a monthly net return of -0.71%.

Dedicate time on things you can control

Yet, when you worry about outliving your money, it can be hard to remain unaffected by market swings. Still, you don’t want to waste time worrying about the things out of your control, Your free time is a valued commodity.

Therefore, it should be dedicated to what you can control. In investing, that includes costs, such as fund fees and management expenses; your asset allocation, or right mix of investments in your portfolio; and rebalancing to return your allocation to its target levels. Outside of your portfolio, that means focusing on accomplishing all things you plan to do with the time you have.

When you don’t let money decisions consume all your time in retirement, you may have more of it to work on your goals. Plus, it just might make you a better investor, too. So, how will you spend your time in retirement?