It was only a few months ago that our economy was on the brink of extinction. Or at least, that’s what everybody was preparing for… stocking up on guns and canned food. Oh how far we have come in such a short amount of time. Popular economic indicators are moving back into positive territory and the wait at the local restaurant has gotten a bit longer. Yes, it is now OK to take the cash from underneath your mattress and re-start investing in your future.

The only problem remaining is that faint stinging sensation we all experienced when our investments took a nose dive starting last fall. It is hard to ignore that voice in the back of your head yelling at you to think before you invest. And it’s equally more difficult to sit on the sidelines as the market starts climbing out of the deep valley. What do you do? When do you do it?

The first step to getting back on track lies in self-honesty. What do you need versus what do you want? In a perfect world, everyone would be rich and no one would be poor. Life is a zero sum game and thus you have to play by those rules. When someone wins another person loses. In that scope, we need to define ourselves as winners. When you ask the above question in the perspective of your retirement, what do you really need to have in that long-distant future? For most people, you want a place to live and food on the table.

Parents out there want to provide a successful future for their children. Let’s not forget the growing medical costs that our seniors suffer with as they thrive into their golden years.

You are probably now pondering how to ascertain these potential future costs. While that is important, it does fall outside the scope of this discussion. I would shortly summarize your answer by instructing you to seek advice from a financial professional. The Financial Advisor is trained and armed with tools to define your “target return” and can accommodate for the millions of variations between investors. It would be doing you an injustice for me to attempt trying to approximate your future life costs. Go seek help and ask for a free analysis.

The Financial Advisor will help you find your target rate of return. Generally speaking, this is determined by looking at current assets and future liabilities. The goal is to grow the current assets to a level that can subsidize your future liabilities. This asset growth would become the result for investing in your “target rate of return”. On average, your investments should yield this return for as many years as you need until you reach your goal. Notice, I said this will be an “average” return and that each year through time may be better or worse than another. The difference between what your portfolio yields and your target rate of return represents the risk you are experiencing. The more risk you take on, the more return you can receive.

Risk will also punish your investments at various intervals of your investment time horizon. That is what the voice in the back of your head is trying to remind you. You can quiet that voice through asset allocation. In a nutshell, asset allocation diversifies your portfolio across the investable universe with the goal of stabilizing your average return. Again, the Financial Advisor is trained with tools to define exactly what your asset allocation should be. Keep in mind though that your asset allocation is only a snapshot in time and will/should change. When do you change your asset allocation? The answer is by observing your portfolio risk.

The target rate of return is what you need to retire. If your portfolio is yielding less than this rate, then you need to change your asset allocation in order to increase the yield. This step is called “reallocating” and basically means moving your money between existing investments. The most overlooked aspect of reallocation is implementing this strategy when your portfolio is earning more than your target rate of return. You may want to earn more than you need, but you are doing so at a higher risk. For example, in 2007 most investors were likely earning more than they needed in their portfolios. Instead of reallocating into lower returning asset classes, they accepted the increased risk. In 2008, they regretted this decision as they lost more money than they were comfortable with. Had they instead reallocated down to their target rate of return, they would not have suffered as much.

The only certainty in life is change. Your portfolio returns will change over time. Reallocating your portfolio stabilizes these changes. Do not forget that your wants and needs may change which may lead into a change into your target rate of return. Frequently observe the changes in your life and in your portfolio and you will succeed in reaching your retirement goals.