At least once a week we are approached and asked “what’s the best retirement investment strategy”? Indexing? ETFs? Real Estate? Over the last couple weeks, the question has also evolved to include should I go to cash because of the current market volatility?

First, there is no single “right” investment for each individual or couple. As wealth management advisors, we have a fiduciary obligation to provide tailored personal advice to each client. How do we do this?

There are core tenets that we believe every individual should follow. First, maximize your investments in qualified retirement plans through your employer. If there is an investment match, it is free money – take it! Then, depending on your risk profile (risk taker? conservative? somewhere in between?) and your time horizon (how much time do you have until you need the investment portfolio distributed), structure a portfolio that will help maximize returns within your tolerance for risk. Pay attention to the tax consequences of your decisions, and look to providers that have low portfolio turnover.

For someone close to retirement, generally their risk appetite will be more cautious than someone starting their career. The idea is that someone at the beginning of the career cycle has a 30-year plus investing horizon. The money they invest has 30 years to move up and down, and over the long term potentially grow. Someone within 10 years of retirement, has less of a time horizon, and generally has to be more cautious in how they structure the risk element of their portfolio.

This leads into the “should I go to cash?” discussion when the market gets more volatile and someone is closer to retirement.

A major issue with going to cash is that timing of the market rarely works. An oft-cited study by University of Michigan Professor H. Nejat Seyhun, highlights the issue with great clarity. One key take away from this study states that from 1963 to 1993, only 1.2% of the days the market was open for business accounted for 95% of the market gains.* A second challenge about moving money to cash in a checking account or low interest producing account is that it may not keep up with inflation (meaning the rising costs of goods and services). Most would argue that they would only hold funds in cash for a “short” period of time, but if the period is “short” the issue about market timing becomes front and center.

We believe a more prudent way to invest is to make sure you are invested in the market with broad diversification and the correct risk posture. If you are feeling nervous about the market swings, and your investment fluctuation, maybe you need to be more cautious in your approach so that you stop “worrying” about the market.

* H. Nejat Seyhun, University of Michigan, “Stock Market Extremes and Portfolio Performance,” 1994. Investors cannot invest directly in an index.An exchange-traded fund (ETF) is a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs are typically registered as unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Some ETFs that invest in commodities, currencies or commodity- or currency-based instruments are not registered as investment companies. Unlike traditional UITs or mutual funds, shares of ETFs typically trade throughout the day on an exchange at prices established by the market. These ETFs are not managed by the issuer. Investors must buy or sell ETF shares in the secondary market with the assistance of a stockbroker. In doing so, the investor will incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market. Moderate inflation is a common result of economic growth. Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times. Diversification does not guarantee a profit or protect against a loss.