As a case study, I bring you the story of The Simkin family: Getting back on the retirement horse

“Jason and Patty Simkins, both 40, have saved next to nothing for retirement in the past year.  They were rattled by the rocky market, which caused the value of their portfolio to tumble 40% at its low point.”

“So when Jason switched jobs last fall… he neglected his new 401(k).  Saying, “I didn’t want to throw money into it if it was just going to be lost.”

“But now they’re disappointed to have missed out on additional gains from the market’s rebound.”

“Realizing they need to catch up on retirement (and, with two kids, save for college), they’re ready to put a toe back in the water.”

I think all of us can relate to The Simkin’s story.  Last year as the markets were being pummeled day after day, even the most iron-willed of us surely contemplated exiting the markets, or at the very least stopping our ongoing contributions.  The problem with this, as the Simkins indicated, is that they’ve consequently missed out on the juicy 60% returns the market has put in since bottoming.  Now, only after this enormous rally, are they looking to restart their retirement plan contributions.  This my friends is not the modus operandi of successful investors.

Instead, I offer the following plan to passive retirement investors…

First, familiarize yourself with the concept of asset allocation.  Once familiarized, develop a diversified asset allocation that coincides with your risk tolerance and time horizon.  (note: you’re probably less risk tolerant than you think)

Second, contribute to your retirement accounts using a dollar-cost averaging plan.  This entails investing a fixed amount of money on a monthly or per paycheck basis.  These contributions should match the asset allocation you created in step one.

Third, every quarter check up on your portfolio and revisit your asset allocation.  Are your current holdings in-line with your plan? If not, rebalance your portfolio so it isn’t too aggressive or conservative.

Finally, once every year you need to reexamine your risk tolerance and time horizon.  If they’ve changed, chances are you need to modify your asset allocation.

There you have it.  Following these simple steps will give you a disciplined financial plan that you can implement in an emotionless manner. Give it a try and your odds of being a successful long-term investor are high.