Start young to build your (retirement) wardrobe

No, we're not suggesting you start shopping now for what to wear when you retire. We just think fashion is a pretty cool example of two principals of investing – asset allocation and diversification.

If we open your closet, we'd probably see a wardrobe full of different fashions that help reduce your risk of being cornered by the "fashion police." And unless you want to wear the same thing every day, your wardrobe may include different categories, such as slacks, shirts and shoes (these would be your asset allocation.) Further, you likely have a variety of styles such as casual, formal, and sports apparel. You have diversified your wardrobe into a number of more defined groups. Likewise, building variety into your 401(k) with the proper asset allocation and diversification strategies may help reduce your overall investment risk.

Not your parents' retirement plan
The styles you wear are probably quite different from your parents' fashion choices, and the same may hold true for your investments. Your parents might be investing more conservatively these days, but this may be your season to stretch your risk tolerance as far as it can go. If your parents are investing conservatively, have you considered your risk tolerance for investing more aggressively? While stocks investments have the highest risk (compared to bonds and cash alternatives), with time on your side, you may be able to absorb some risk in return for potential growth.

A quick way to determine a possible percentage to consider investing in stocks is to subtract your age from the number 110. If you have less than that percentage in stocks, maybe you invested too conservatively for your age. If you haven't considered how to allocate your assets or if you need help determining your risk tolerance, use the Asset Allocation Profiler.

Silver lining
You may have lost faith in the stock market because of its recent volatility, but that may mean good news for you. When the stock market is down, so are prices. Think of it this way. If your favorite store had its biggest sale in 70 years, you wouldn't wait until after the sale to get some new outfits, would you?

Stocks are "on sale" now. With dollar cost averaging, your payroll contributions to your 401(k) remain constant, but these dollars buy more shares when mutual fund prices are low. When the bear market ends and the bull market comes back around, you'll own more shares that may start climbing in value. In fact, this may even be a good time to increase your contributions to take advantage of lower prices.

There's more good news. Markets are cyclical, but should the economy encounter another bear market, people in their 20s and 30s may have time to recover (and buy up those shares again) before they hit the retirement years.

What can you fashion from all of this? Diversify. Think long term. You've got some time.

Sources:

Denver Post, www.denverpost.com, "Young investors wary despite stocks' history of bouncing back," Aldo Svaldi, August 7, 2009.

American Savings Education Council, "Preparing for Their Future: A Look at the Financial State of Gen X and Gen Y," March 2008.

Financial Young, www.financialyoung.com, "How Gen Y Should View the Stock Market Right Now," May 2009.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.

The information presented in this article is for educational purposes only and should not be construed as investment advice. Other investment alternatives having similar risk and return characteristics may be available under the plan. Information on investment alternatives may be obtained by calling J.P. Morgan. In applying particular asset allocation models to a particular situation, plan participants should consider other assets, income and investments (e.g., equity in a home, IRA investments, savings accounts and interests in other qualified and non-qualified plans) in addition to your interests in the plan.

Diversification does not assure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.