As Americans, we’ve had to collectively “let go” of our old notions of retirement savings.

Yes, there was a time when most middle-class Americans could work until they were 65 and then look forward to a financially-secure retirement. But along with many other versions of our Pollyanna 1950s Americana, those days are over.

Economists used to speak of retirement security as a three-legged stool. Pensions were one leg of the stool, savings were another, and Social Security was the third. The pension leg of the stool is all but gone and the Social Security leg is weak, underfunded and in peril of being kicked out at any time as political leverage. That means that for a secure financial future, you need to take control of your retirement and actively manage your savings accounts, especially your IRA.

There are countless approaches and strategies for growing your nest egg, but there are two essential concepts that you must understand in order to be successful for the long haul –Diversification and Risk to Return.

Diversification

The common advice is that buying and holding a diversified portfolio of passively managed mutual funds or ETFs is the way to “manage” your IRA. No matter what the market “gurus” tell you, truediversification involves spreading your retirement assets beyond a couple of mutual funds. Tactical asset allocation relies on having other asset classes that are not correlated so that when one asset class is under performing, another one becomes a hedge and rises to compensate. With the interconnectedness of global markets and the new correlation paradigms, IRA portfolios can have large swings if not properly balanced or actively managed.

Risk to Return

The other important part of the successful retirement dance is risk to return.“Risk” refers to the degree to which an investor may lose his or her investment. “Return” refers to how an investment performs – how much it gains or loses over a period of time. Yet so few investors or traders seem to have a clear picture of what this trade-off looks like for their portfolio.

To figure a risk-to-return ratio is very straight forward.  You take a given event, determine the maximum amount of money you can make, determine the maximum amount you can lose and simply divide the two.  That gives you your reward/risk ratio.  What you do with this number is quite subjective.  Is a risk ratio of 1.5:1 good?  How about 5:1? 

Traders have different risk tolerances.  It’s a simple fact of human nature.  Is it better to be more or less risk averse?  The answer is this:  it is neither better nor worse to have higher or lower risk tolerances.  The key is you can’t be a part-time member of either club!  You cannot choose one day to be risky and one day to apply a different set of rules.  You might as well not employ any rules at all.

Step one is to honestly assess your own risk tolerance and the risk-to-return ratio in your current portfolio. Once you have a handle on your current investments, then you can rebalance and reallocate to put the odds more in your favor.

For more, see our free whitepaper – Five Reasons Why You Should Be Trading In Your IRA, click here.

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Julie Saltzman has been involved in the trading industry for over 20 years as a writer, a floor trader,  and an educator. Saltzman began her career as a trader for Banque National de Paris in the currency option pits of the Chicago Mercantile Exchange and has spent the past five years exclusively in the trading education space. She is passionate about helping to level the playing field for all investors and is currently the Senior Project Manager for TraderPlanet PRIME, an online portal that provides exclusive interactive education and actionable trade strategies for your IRA.