Despite today’s economic uncertainty and turbulent financial markets, Central Ohio financial professionals say there are innovative ways for investors to satisfy their need for security while positioning their portfolios for growth.

Given the difficulty in predicting market movements, savvy investors safeguard against volatility by structuring their portfolios so they are prepared for multiple scenarios, says Andrew Keeler, a certified financial planner (CFP) and partner with Everhart Financial Group in Columbus. “We want the highest potential return with the least amount of risk, so we want to divide the portfolio among asset classes that are not correlated,” he explains.

While there’s no certain way to bullet proof a growth-oriented portfolio against market losses, an asset allocation strategy is an important safeguard, Keeler says.

 

Diversification is vital
Noting that diversification is an inextricable aspect of asset allocation, he explains that dividing funds between uncorrelated asset classes provides some protection against loss when one type of investment is underperforming. Because the values of different investments often move in opposite directions, investing in a range of securities reduces the risk that all assets will be decreasing in value at the same time.

“When one investment ‘zigs’ in the market, we want to make sure that other investments are ‘zagging,’” Keeler says. “But we often find that many investors pick asset allocations that are correlated. For example, they might invest in a large-cap growth fund and a small-cap growth fund. Those funds would typically move in the same direction.”

Conversely, he says, an example of a portfolio with diversified, uncorrelated investments would be one with an S&P 500 index fund along with a commodities fund and an inflation-adjusted bond fund.

In addition to deploying funds among stocks, bonds and cash, it’s important to diversify within each of the separate classes. For example, the stock portion of your portfolio may include shares of blue-chip and growth issues. Your stock holdings could also include shares from different industries such as consumer goods, technology, and manufacturing.

 

Benefits of ETFs and TIPS
Everhart Financial offers a wide range of services to individuals and families. However, do-it-yourself investors can easily and effectively diversify their portfolios through the use of relatively new financial vehicles called Exchanged Traded Funds (ETFs).

ETFs combine the trading flexibility of individual stocks with the diversification benefits of mutual funds. ETFs are similar to mutual funds in that they hold a basket of stocks, giving investors a diversified portfolio with just one purchase. But unlike mutual funds, they are traded on financial exchanges, where you can buy and sell them throughout the day, like stocks.

The first ETFs tended to track broad market indexes, like the popular SPDR, which is pegged to the S&P 500, and the Nasdaq 100, which follows the benchmark of the same name. Nowadays, ETFs are becoming increasingly focused, offering access to specialized market niches, ranging from specific foreign countries, to futures prices, to stocks with low price-to-earnings ratios.

Keep in mind that market prices for ETFs can fluctuate widely, depending on economic conditions, global events, investor sentiment, and security-specific factors.

Investors who are concerned about inflation may want to check out Treasury Inflation-Protected Securities, or TIPS. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal. Therefore, like the principal, interest payments rise with inflation and fall with deflation.

 

Don’t delay planning
Most financial professionals will tell you that the “how” of investing for retirement may not be as important as the “when.” Young people who set aside even small amounts on a regular basis can accumulate a significant retirement fund, thanks to the wonders of compound interest.

Nevertheless, experts say that many Americans wait until they are in their 40s or 50s to start planning for their retirement years. As a consequence, less than 30 percent of Americans aged 55 and over have total savings of more than $100,000 (excluding the value of their house), according to a survey by the Employee Benefit Research Institute. For those who will receive income from an employer-sponsored pension plan, $100,000 in savings might provide a comfortable retirement. But without pension income, $100,000 won’t go far, even with Social Security benefits.

If you’re serious about planning for your retirement, you’ll want to take a hard look at your financial situation, says Paul Dolce, a CFP and president of Financial Solutions LLC, which is based in Dublin.

“Baby boomers have to ask themselves if they are saving enough for retirement and if their asset allocation is correct,” Dolce says. “A competent financial planner can help with both of those questions. The planner can look at the client’s investments and determine if they are appropriate for their goals, lifestyle, risk tolerance, and age. We can develop a financial plan that takes into account the client’s spending profile, their projected retirement age, and whether they are going to have pension income or if they have to rely solely on their savings.”

 

Make the years golden
Research studies show that many baby boomers neglect their retirement planning because they believe they are going to continue working beyond the traditional retirement age. But if individuals are not planning adequately for their older years, they may find they are left with less lifestyle than they envision.

However, Dolce says, there’s good news for baby boomers who have underfunded their retirement nest eggs. If you’re willing to adjust your lifestyle and your expectations for retirement, there are financial catch-up strategies that can provide security for your golden years.

The first step for late savers is to do a retirement needs calculation. Financial experts say you should plan on retiring with at least 80 percent of your pre-retirement income. To determine how much you’ll need to sock away to provide that level of income, check out one of the many Web-based financial calculators. The American Savings Education Council (ASEC) offers a retirement calculator at its site, www.asec.org.

Because medical co-pays and deductibles are rising each year, baby boomers should consider putting away an additional $100,000 - $150,000 just to cover health expenses. “The cost of medical care will probably increase faster than the rate of inflation, so it’s important to factor health care expenses into in any retirement plan,” says Dolce.

If you’re 50-something and playing catch-up with your retirement savings, here are some tips:

• Maximize tax-deferred accounts. Once you’ve reached the age of 50, the federal government allows you to make “catch-up” contributions to your IRA and 401(k) plan. For example, at age 49 you can put up to $15,500 in your 401(k) in 2008. But at 50 and above, you can put an additional $5,000 away, for a total of $20,500. For IRAs, the 2008 maximum tax-deferred contribution is $5,000. But if you’re 50 plus, you can put in an extra $1000 for a total of $6,000. The catch-up provision also applies to 403(b) and 457(b) plans.
• If investable income is limited, you may want to consider some financial belt-tightening in order to contribute maximum amounts to retirement plans. In recent years, much of the responsibility of retirement funding has shifted from employers to employees. Therefore, individuals need to focus on how much they are spending and how much they need to save. “Most people spend as much money during retirement as they did while they were working,” Dolce says. “They want to travel and they don’t want to cut back on their lifestyle. They may even be more active in retirement because they have more time. It’s never too late to start a financial plan. If you don’t have a plan, get started now so that you don’t short-change yourself in retirement.”