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ETFs can diversify your portfolio.

By Michael Christodoulou

Michael Christodoulou

Mutual funds offer investors a chance to own shares in dozens of companies, as well as bonds, government securities and other investments. But you might be able to broaden your portfolio further by owning another type of fund — an exchange-traded fund (ETF).

An ETF, like a mutual fund, can own an array of investments, including stocks, bonds and other securities. Many ETFs are passively managed in that they track the performance of a specific index, such as the S&P 500. In this respect, they differ from most mutual funds, which tend to be actively managed — that is, the fund managers are free to buy and sell individual securities within the fund.

Another difference between ETFs and mutual funds is that ETFs are traded like stocks, so shares are bought and sold throughout the day based on the current market price, whereas mutual funds are traded just once a day, at a price calculated at the end of the trading day. Whether this ability to make intra-day trades is meaningful to you will likely depend on how active you are in managing your own investments.

For some people, the main attraction of ETFs is their tax advantages. Because many ETFs are index funds, they generally do much less buying and selling than actively managed funds — and fewer sales mean fewer taxable capital gains. These ETFs are somewhat similar to index mutual funds, which are also considered to be tax-efficient, as opposed to actively managed funds, which constantly buy and sell investments, passing on taxable capital gains to you throughout the life of the fund. 

Keep in mind, though, that mutual funds that trade frequently may still be appropriate for your financial strategy. While taxes are one element to consider when evaluating mutual funds, or any investment, other factors, such as growth potential and ability to diversify your portfolio, are also important.

ETFs typically also have lower operating costs than mutual funds, resulting in lower overall fees. Part of the reason for these lower costs is that actively managed mutual funds, by definition, usually have larger management teams devoted to researching, buying and selling securities. By contrast, passively managed ETFs may have leaner, less-costly management structures.

But while most ETFs may share the same basic operating model, many types are available. You can invest in equity ETFs, which may track stocks in a particular industry or an index of equities (S&P 500, Dow Jones Industrial Average, and so on), or you can purchase fixed-income ETFs, which invest in bonds. ETFs are also available for currencies and commodities.

Of course, as with all investments, ETF investing does involve risk. Your principal and investment return will fluctuate in value, so when you redeem your ETF, it may be worth more or less than the original investment. Also, liquidity may be an issue. Some ETFs may be more difficult to sell than other investments, which could be a problem if you need the money quickly. And because it’s so easy to move in and out of ETFs, you might be tempted to “overtrade” rather than following an appropriate long-term investment strategy.

A financial professional can evaluate your situation and help you determine whether ETFs are suitable for your needs. At a minimum, they represent another investment opportunity that may prove useful as you work toward your financial goals.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

Michael Christodoulou

Another school year will soon come to a close. And if you have young children, they’re now a year closer to heading off to college or some other type of post-secondary education or training. So, if you haven’t already done so, you may want to start preparing for these costs.

And they can be considerable. During the 2022-23 school year, the average estimated annual cost (tuition, fees, room and board, books, supplies, transportation and other personal expenses) was nearly $28,000 for public four-year in-state schools and more than $57,000 for private nonprofit four-year schools, according to the College Board.

Of course, some students don’t pay the full bill for college. Any grants and scholarships they receive can bring down the “sticker price.” Still, there’s often a sizable amount that students and their families must come up with. To help fill this gap, you may want to explore various strategies, one of which is a 529 education savings plan.

A 529 plan offers several key benefits. First of all, your earnings can grow tax deferred and your withdrawals are federally tax free when used for qualified education expenses, such as tuition, fees, books and so on. You may be eligible to invest in a 529 plan in most states, but depending on where you live, you may be able to deduct your contributions from your state income tax or possibly receive a state tax credit for investing in your home state’s 529 plan. Tax issues for 529 plans can be complex. Please consult your tax advisory about your situation.  

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And 529 plans aren’t just for college. You may be able to use one to pay K-12 expenses, up to $10,000 per student per year. (However, not all states comply with this 529 expansion for K-12, so you might not be able to claim deductions and your withdrawals could be subject to state tax penalties.)  

A 529 plan can also be used to pay for most expenses connected to apprenticeship programs registered with the U.S. Department of Labor. These programs are often available at community colleges and combine classroom education with on-the-job training.

Furthermore, you can now withdraw funds from a 529 plan to repay qualified federal private and student loans, up to $10,000 for each 529 plan beneficiary and another $10,000 for each of the beneficiary’s siblings.

But what if you’ve named a child as a 529 plan beneficiary and that child doesn’t want to pursue any type of advanced education? If this happens, you, as the account owner, are free to name another family member as beneficiary.

And beginning in 2024, you may have even more flexibility if a child foregoes college or other post-secondary education. Due to the passing of the Secure Act 2.0 in December 2022, unused 529 plan funds of up to $35,000 may be eligible to roll over to a Roth IRA of the designated beneficiary.

One of the qualifications for this rollover is to have had your 529 plan for at least 15 years. To determine if you qualify for this rollover, you will want to consult your tax advisor.

A 529 plan has a lot to offer — and it might be something to consider for your family’s future.

Withdrawals used for expenses other than qualified education expenses may be subject to federal and state taxes, plus a 10% penalty. Make sure to discuss the potential financial aid impacts with a financial aid professional as Edward Jones, its financial advisors and employees cannot provide tax or legal advice.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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Invest in your future on Earth Day. METRO photo

By Michael Christodoulou

Michael Christodoulou

It’s almost Earth Day, when people around the world focus on ways of protecting and preserving the environment. And the lessons from this occasion can be applied to other areas of life — such as investing.

Here are some themes to consider:

Sustainability – From an environmental perspective, sustainability encompasses a range of issues, such as using natural resources wisely. As an investor, you, too, need to protect your resources.

So, for example, to sustain a long-term investment strategy, you won’t want to dip into your retirement accounts, such as your IRA and 401(k), to pay for major home or car repairs or other unexpected, costly bills before retirement.

You can help prevent this by building an emergency fund containing several months’ worth of living expenses, with the money kept in a liquid, low-risk account. And once you’re retired, you need to sustain your portfolio so it can help provide income for many years. For that to happen, you’ll need to maintain a withdrawal rate that doesn’t deplete your investments too soon.

Growth potential – Many people plant trees to celebrate Earth Day, with the hope that, as the trees grow, they’ll contribute to cleaner air. When you invest, you also need growth potential if you’re going to achieve your goals, including a comfortable retirement.

So, your portfolio will need a reasonable percentage of growth-oriented vehicles, such as stocks and stock-based mutual funds or exchange-traded funds (ETFs). Yet, you do need to be aware that these investments can lose value, especially during downturns in the financial markets. You can help reduce the impact of market turbulence on your holdings by also owning other types of investments, such as bonds, government securities and certificates of deposit (CDs).

While these investments can also lose value, they are typically less volatile than stocks and stock-based mutual funds and ETFs. The appropriate percentage of growth and fixed-income investments in your portfolio depends on your risk tolerance, time horizon and long-term objectives.

Avoidance of “toxins” – At some Earth Day events, you can learn about positive behaviors such as disposing of toxic items safely. And in the investment world, you’ll also want to avoid toxic activities, such as chasing “hot” stocks that aren’t appropriate for your needs, or trading investments so frequently that you run up commissions and taxes or jumping out of the markets altogether when there’s a temporary decline.

Consolidation – Getting rid of clutter and unnecessary possessions is another lesson some people take away from Earth Day. All of us, when we look around our homes, could probably find many duplicate items — do we really need two blenders or three brooms or five staplers? When you invest, it’s also surprisingly easy to pick up “clutter” in the form of multiple accounts. You might have an IRA with one financial company and brokerage accounts with two or three others.

If you were to consolidate these accounts with one provider, you might reduce correspondence — even if it is online — and possibly even lower the fees you pay. But perhaps more important, by consolidating these accounts at one place, possibly with the guidance of a financial professional who knows your needs and goals, you may find it easier to follow a single, unified investment strategy.

Earth Day only happens once a year — but it may provide lessons for investors that can last a lifetime.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

 

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By Michael Christodoulou

During your working years, you generally know how much money you’re bringing in, so you can budget accordingly. But once you’re retired, it’s a different story. However, with some diligence, you can put together a “paycheck” that can help you meet your income needs.  

Where will this paycheck come from? Social Security benefits should replace about 40% of one’s pre-retirement earnings, according to the Social Security Administration, but this figure varies widely based on an individual’s circumstances. Typically, the higher your income before you retire, the lower the percentage will be replaced by Social Security. Private pensions have become much rarer in recent decades, though you might receive one if you worked for a government agency or a large company. But in any case, to fill out your retirement paycheck, you may need to draw heavily on your investment portfolio.   

Your portfolio can provide you with income in these ways:

Dividends: When you were working, and you didn’t have to depend on your portfolio for income to the extent you will when you’re retired, you may have reinvested the dividends you received from stocks and stock-based mutual funds, increasing the number of shares you own in these investments. And that was a good move, because increased share ownership is a great way to help build wealth. But once you’re retired, you may need to start accepting the dividends to boost your cash flow.

Interest payments: The interest payments from bonds and other fixed-income investments, such as certificates of deposit (CDs), can also add to your retirement income. In the years immediately preceding their retirement, some investors increase the presence of these interest-paying investments in their portfolio. (But even during retirement, you’ll need some growth potential in your investments to help keep you ahead of inflation.)

Proceeds from selling investments:  While you will likely need to begin selling investments once you’re retired, you’ll need to be careful not to liquidate your portfolio too quickly. How much can you sell each year? The answer depends on several factors — your age, the size of your portfolio, the amount of income you receive from other sources, your spouse’s income, your retirement lifestyle, and so on. A financial professional can help you determine the amount and type of investment sales that are appropriate for your needs while considering the needs of your portfolio over your lifetime.  

When tapping into your investments as part of your retirement paycheck, you’ll also want to pay special attention to the amount of cash in your portfolio. It’s a good idea to have enough cash available to cover a year’s worth of your living expenses, even after accounting for other sources of income, such as Social Security or pensions. In addition, you may want to set aside sufficient cash for emergencies. Not only will these cash cushions help you with the cost of living and unexpected costs, but they might also enable you to avoid digging deeper into your long-term investments than you might like.

You may be retired for a long time — so take the steps necessary to build a consistent retirement paycheck.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

When you’re working, you may spend decades contributing to retirement accounts such as your 401(k) and IRA. Once you’re retired, though, you’ll likely need to begin withdrawing from these accounts to help pay for your living expenses. In fact, you’ll be required to take money from them at a certain age — but that age requirement is changing, and it could lead to changes in your financial strategy.

Let’s look at some background behind this development. You put in pre-tax dollars to a traditional IRA and 401(k), so your contributions can lower your taxable income and your earnings can grow on a tax-deferred basis. Eventually, though, you must take withdrawals from these accounts or face tax penalties. (A Roth IRA does not have the withdrawal requirement; you can essentially keep the money intact as long as you choose.) 

As part of the SECURE Act 2.0 of 2022, the age at which you must take these withdrawals — technically called required minimum distributions, or RMDs — has increased from 72 to 73. So, if you turn 72 in 2023, you now have another year before you’re required to take RMDs.

The SECURE Act 2.0 also mandates that, in 2033, the RMD age will increase again — to 75 — so, depending on your current age, you may have even more time to plan for the effects of RMDs. Of course, you may need to start taking withdrawals from your retirement accounts before you reach either RMD age — 73 or 75 — so the additional time may not mean much to you. But if you can afford to wait until you must start taking RMDs, what issues should you consider?

Perhaps the most important one is taxes. Your RMDs, which are based on your life expectancy and account balances, are considered taxable income in the year in which you accept the money. If you have sizable amounts in your traditional IRA and 401(k), these RMDs could be large enough to bump you into a higher tax bracket, leading to greater taxation of Social Security benefits and a Medicare surcharge. So, the ability to delay taking RMDs can be beneficial from a tax standpoint, at least for a time. On the other hand, by delaying RMDs, you might eventually have to take bigger taxable withdrawals from your accounts that may have larger balances because they’ve had more time to potentially grow.

You could address the issue of taxable withdrawals by converting your traditional IRA to a Roth IRA before you’re faced with RMDs — and now, you have more time to do so. Roth IRAs have no RMDs, and since a Roth IRA is funded with after-tax dollars, your withdrawals are tax free, provided you don’t begin taking them until you’re at least 59½ and you’ve had your account at least five years. Again, though, taxes are the issue — any pre-tax dollars you convert from a traditional IRA to a Roth IRA will be taxable in the year of the conversion. To reduce this tax hit, you could space out the conversion over several years.

When thinking about delaying RMDs or doing a Roth IRA conversion to avoid RMDs, you’ll need to consult with your tax advisor. But the new RMD age limits do give you more flexibility in these areas, so think carefully about how you might benefit from the added time.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

There aren’t many drawbacks to having a high income — but being unable to invest in a Roth IRA might be one of them. Are there strategies that allow high-income earners to contribute to this valuable retirement account?

Before we delve into that question, let’s consider the rules. In 2023, you can contribute the full amount to a Roth IRA — $6,500, or $7,500 if you’re 50 or older — if your modified adjusted gross income is less than $138,000 (if you’re single) or $218,000 (if you’re married and filing jointly). If you earn more than these amounts, the amount you can contribute decreases until it’s phased out completely if your income exceeds $153,000 (single) or $228,000 (married, filing jointly).

A Roth IRA is attractive because its earnings and withdrawals are tax free, provided you’ve had the account at least five years and you don’t start taking money out until you’re 59½. Furthermore, when you own a Roth IRA, you’re not required to take withdrawals from it when you turn 72, as you would with a traditional IRA, so you’ll have more flexibility in your retirement income planning and your money will have the chance to potentially keep growing. 

But given your income, how can you contribute to a Roth?

You may want to consider what’s known as a “backdoor Roth” strategy. Essentially, this involves contributing money to a new traditional IRA, or taking money from an existing one, and then converting the funds to a Roth IRA. But while this backdoor strategy sounds simple, it involves some serious considerations.

Specifically, you need to evaluate how much of your traditional IRA is in pretax or after-tax dollars. When you contribute pretax dollars to a traditional IRA, your contributions lower your annual taxable income. However, if your income is high enough to disqualify you from contributing directly to a Roth IRA, you may also earn too much to make deductible (pretax) contributions to a traditional IRA. Consequently, you might have contributed after-tax dollars to your traditional IRA, on top of the pretax ones you may have put in when your income was lower. (Earnings on after-tax contributions will be treated as pretax amounts.)

In any case, if you convert pretax assets from your traditional IRA to a Roth IRA, the amount converted will be fully taxable in the year of the conversion. So, if you were to convert a large amount of these assets, you could face a hefty tax bill. And since you probably don’t want to take funds from the converted IRA itself to pay for the taxes, you’d need another source of funding, possibly from your savings and other investments.

Ultimately, then, a backdoor Roth IRA strategy may make the most sense if you have few or no pretax assets in any traditional IRA, including a SEP-IRA and a SIMPLE IRA. If you do have a sizable amount of pretax dollars in your IRA, and you’d still like to convert it to a Roth IRA, you could consider spreading the conversion over a period of years, potentially diluting your tax burden.

Consult with your tax advisor when considering a backdoor Roth strategy. But if it’s appropriate for your situation, it could play a role in your financial strategy, so give it some thought.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

If you receive Social Security, you’ve probably already heard that your checks in 2023 will be bigger — considerably bigger, in fact. How can you make the best use of this extra money?

Here’s what’s happening: For 2023, there’s an 8.7% cost-of-living adjustment (COLA) for Social Security benefits — the largest increase in 40 years. Also, the monthly Medicare Part B premiums are declining next year, to $164.90/month from $170.10/month, which will also modestly boost Social Security checks for those enrolled in Part B, as these premiums are automatically deducted.

Of course, the sizable COLA is due to the high inflation of 2022, as the Social Security Administration uses a formula based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). So, it’s certainly possible that you will need some, or perhaps all, of your larger checks to pay for the increased cost of goods and services. But if your cash flow is already relatively strong, you might want to consider these suggestions for using your bigger checks:

Reduce withdrawals from your investment portfolio. When you’re retired, you will likely need to withdraw a certain amount from your portfolio each year to meet your expenses. A boost in your Social Security may enable you to withdraw less, at least for a year. This can be particularly advantageous when the markets are down, as you’d like to avoid, as much as possible, selling investments and withdrawing the money when investment prices are low. And the fewer investments you need to sell, the longer your portfolio may last during your retirement years.

Help build your cash reserves. When you’re retired, it’s a good idea to maintain about a year’s worth of the amount you’ll spend from your portfolio in cash, while also keeping three months’ of your spending needs in an emergency fund, with the money kept in a liquid, low-risk account. Your higher Social Security checks could help you build these cash reserves. (Also, it’s helpful to keep another three to five years’ worth of spending from your portfolio in short-term, fixed-income investments, which now, due to higher interest rates, offer better income opportunities.)

Contribute to a 529 plan. You could use some of your extra Social Security money to contribute to a tax-advantaged 529 education savings plan for your grandchildren or other family members.

Contribute to charitable organizations. You might want to use some of your Social Security money to expand your charitable giving. Your generosity will help worthy groups and possibly bring you some tax benefits, too.

While it’s nice to have these possible options in 2023, you can’t count on future COLA increases being as large. The jump in inflation in 2022 was due to several unusual factors, including pandemic-related government spending, supply shortages and the Russian invasion of Ukraine. It’s quite possible, perhaps even likely, that inflation will subside in 2023, which, in turn, would mean a smaller COLA bump in 2024.

Nonetheless, while you might not want to include large annual COLA increases as part of your long-term financial strategy, you may well choose to take advantage, in some of the ways described above, of the bigger Social Security checks you’ll receive in 2023. When opportunity knocks, you may want to open the door.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

You can find many ways to support charitable organizations. One method that’s gained popularity over the past few years is called a donor-advised fund. Should you consider it?

The answer depends on your individual situation, because donor-advised funds are not appropriate for everyone. However, if you’re in a position to make larger charitable gifts, you might at least want to see what this strategy has to offer.

Here’s how it works:

Contribute to the fund. You can contribute to your donor-advised fund with cash or marketable securities, which are assets that can be converted to cash quickly. If your contribution is tax deductible, you’ll get the deduction in the year you make the contribution to the fund. Of course, these contributions are still subject to IRS limits on charitable tax deductions and whether you itemize your deductions. 

If you typically don’t give enough each year to itemize and plan on making consistent charitable contributions, you could consider combining multiple years’ worth of planned giving into a single donor-advised fund contribution, and claim a larger deduction in that year. This move may be especially impactful if you have years with a higher amount of income, with an accompanying higher tax rate. If you contribute marketable securities, like stocks and bonds, into the fund, a subsequent sale of the securities avoids capital gains taxes, maximizing the impact of your contribution.

Choose an investment. Typically, donor-advised funds offer several professionally managed diversified portfolios where you can place your contributions. You’ll want to consider the level of investment risk to which your fund may be exposed. And assuming all requirements are met, any investment growth is not taxable to you, the donor-advised fund or the charity that ultimately receives the grant, making your charitable gift go even further.

Choose the charities. You can choose grants for the IRS-approved charities that you want to support. You decide when you want the money donated and how it should be granted. You’re generally free to choose as many IRS-approved charitable organizations as you like. And the tax reporting is relatively easy — you don’t have to keep track of receipts from every charity you support. Instead, you can just keep the receipts from your contributions to the fund.

Although donor-advised funds clearly offer some benefits, there are important trade-offs to consider. For one thing, your contributions are irrevocable, which means once you put the money in the fund, you cannot access it for any reason other than charitable giving. And the investments you choose within your fund will carry some risk, as is true of all investments. Also, donor-advised funds do have investment management fees and other costs. So, consider the impacts of these fees when deciding how you want to give.

In any case, you should consult with your tax and financial professionals before opening a donor-advised fund. And if the fund becomes part of your estate plans, you’ll also want to work with your legal advisor. But give this philanthropic tool some thought — it can help you do some good while also potentially benefiting your own long-term financial strategy.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

It’s unfortunate, but recessions are a fairly normal part of the economic landscape. When a recession occurs, how might you be affected? The answer depends on your individual situation, but regardless of your circumstances, you might want to consider the items in this recession survival checklist: 

Assess your income stability. If your employment remains steady, you may not have to do anything different during a recession. But if you think your income could be threatened or disrupted, you might want to consider joining the “gig economy” or looking for freelance or consulting opportunities. 

Review your spending. Look for ways to trim your spending, such as canceling subscription services you don’t use, eating out less often, and so on. 

Pay down your debts. Try to reduce your debts, especially those with high interest rates. 

Plan your emergency fund. If you haven’t already built one, try to create an emergency fund containing three to six months’ worth of living expenses, with the money kept in a liquid account. 

Review your protection plan. If your health or life insurance is tied to your work, a change in your employment status could jeopardize this coverage. Review all your options for replacing these types of protection. Also, look for ways to lower premiums on home or auto insurance, without significantly sacrificing coverage, to free up money that could be used for health/ life insurance. 

Keep your long-term goals in mind. Even if you adjust your portfolio during times of volatility, don’t lose sight of your long-term goals. Trying to “outsmart” the market with short-term strategies can often lead to missteps and missed opportunities.

Don’t stop investing. If you can afford it, try to continue investing. Coming out of a recession, stock prices tend to bottom out and then rebound, so if you had headed to the investment “sidelines,” you would have missed the opportunity to benefit from a market rally. 

Revisit your performance expectations. During a bear market, you will constantly be reminded of the decline of a particular market index, such as the S&P 500 or the Dow Jones Industrial Average. But instead of focusing on these short-term numbers, look instead at the long-term performance of your portfolio to determine if you’re still on track toward meeting your goals. 

Assess your risk tolerance. If you find yourself worrying excessively about declines in your investment statements, you may want to reevaluate your tolerance for risk. One’s risk tolerance can change over time — and it’s important you feel comfortable with the amount of risk you take when investing.

Keep diversifying. Diversification is always important for investors — by having a mix of stocks, mutual funds and bonds, you can reduce the impact of market volatility on your portfolio. To cite one example: Higher-quality bonds, such as Treasuries, often move in the opposite direction of stocks, so the presence of these bonds in your portfolio, if appropriate for your goals, can be valuable when market conditions are worsening. (Keep in mind, though, that diversification cannot guarantee profits or protect against all losses in a declining market.) 

A recession accompanied by a bear market is not pleasant. But by taking the appropriate steps, you can boost your chances of getting through a difficult period and staying on track toward your important financial goals.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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By Michael Christodoulou

Michael Christodoulou
Michael Christodoulou

There are no shortcuts to investment success  — you need to establish a long-term strategy and stick with it. This means that you’ll want to create an investment mix based on your goals, risk tolerance and time horizon — and then regularly review this mix to ensure it’s still meeting your needs.

In fact, investing for the long term doesn’t necessarily mean you should lock your investments in  forever. Throughout your life, you’ll likely need to make some changes.

Of course, everyone’s situation is different and there’s no prescribed formula of when and how you should adjust your investments. But some possibilities may be worth considering.

For example, a few years before you retire, you may want to re-evaluate your risk exposure and consider moving part of your portfolio into a more risk-averse position. When you were decades away from retiring, you may have felt more comfortable with a more aggressive positioning because you had time to “bounce back” from any market downturns. But as you near retirement, it may make sense to lower your risk level. 

And as part of a move toward a reduced-risk approach, you also may want to evaluate the “cash” positions in your portfolio. When the market has gone through a decline, as has been the case in 2022, you may not want to tap into your portfolio to meet short-term and emergency needs, so having sufficient cash on hand is important. Keep in mind, though, that having too much cash on the “sidelines” may affect your ability to reach your long-term goals.  

Even if you decide to adopt a more risk-averse investment position before you retire, though, you may still benefit from some growth-oriented investments in your portfolio to help you keep ahead of — or at least keep pace with — inflation. As you know, inflation has surged in 2022, but even when it’s been relatively mild, it can still erode your purchasing power significantly over time.

Changes in your own goals or circumstances may also lead you to modify your investment mix. You might decide to retire earlier or later than you originally planned. You might even change your plans for the type of retirement you want, choosing to work part-time for a few years. Your family situation may change — perhaps you have another child for whom you’d like to save and invest for college. Any of these events could lead you to review your portfolio to find new opportunities or to adjust your risk level — or both.

You might wonder if you should also consider changing your investment mix in response to external forces, such as higher interest rates or the rise in inflation this year. It’s certainly true that these types of events can affect parts of your portfolio, but it may not be advisable to react by shuffling your investment mix. 

In the first place, nobody can really predict how long these forces will keep their momentum — it’s quite possible, for instance, that inflation will have subsided noticeably within a year. But more importantly, you should make investment moves based on the factors we’ve already discussed: your goals, risk tolerance, time horizon and individual circumstances.

By reviewing your portfolio regularly, possibly with the assistance of a financial professional, you can help ensure that your investment mix will always be appropriate for your needs and goals.

Michael Christodoulou, ChFC®, AAMS®, CRPC®, CRPS® is a Financial Advisor for Edward Jones in Stony Brook. Member SIPC.

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