I’m a Retirement Planning Expert: 3 Simple Rules I Swear By To Build a Retirement Portfolio

Stock market vector illustration.
VectorMine / Getty Images/iStockphoto

Planning for retirement can be complex, but when it comes to establishing a portfolio that will see you through your retirement years, Jim Penna, manager of retirement services at VectorVest, said it really comes down to three simple rules.

Here are the three rules Penna says to follow to build a healthy retirement nest egg.

Rule No. 1: Have the Right Tools

Penna said that building a strong retirement portfolio requires the proper tools. Specifically, investors need a stock picking and trading system with a proven track record for delivering the results they need.

“You want to be able to analyze stocks in a way that can allow you to make better choices,” he said. “It’s got to be actionable information. Usually, what you’re getting is historical information — then you have to analyze it moving forward.” 

Penna said to look for tools that provide forecasted earnings and other forward-looking information.

“You have to understand the future of the company, as well as the industry and the overall market,” he said.

Rule No. 2: Buy the Safest, Most Undervalued Stocks You Can Find

When Penna selects stocks for a retirement portfolio, he is looking at an indicator he calls “relative safety.”

“Generally speaking, what it means is we’re looking for the consistency and predictability of the financial performance of that company,” he said. “Does the company make money quarter over quarter, year over year? Does it have a history of earnings growth?”

Make Your Money Work Better for You

Other factors Penna looks at to determine if a stock is safe include how long the company has been around, if its dividend has continued to grow if it’s a dividend-paying stock, and the company’s debt-to-equity ratio. In addition to being safe, Penna looks for stocks that are undervalued.

“When we talk about an undervalued stock, what we’re looking at is what that stock is worth right now and its earnings growth rate,” Penna said. “You have to have confidence in the predictability of earnings going forward. When we see sales growing, when we see earnings growing, we look at the history of what that company’s done and put it all together into finding these good quality stocks.”

Penna believes that safe, undervalued stocks are the best bet for long-term investors.

“While no one can predict the future — there’s no guarantee that these stocks, whether it’s Microsoft or Apple, can move higher — but it really comes down to the probability of a company [having] strong and consistent predictable financial performance,” he said. “What two better words to describe the stocks in your retirement portfolio [than] ‘consistent’ and ‘predictable’? Understand, of course, that anything could happen at any time, but a lot of it is about probabilities.”

Rule No. 3: Pay Attention to Market Trends

While many people preach that you can’t time the market, Penna believes that timing the market is actually key to having a robust retirement portfolio.

Make Your Money Work Better for You

“When you say ‘timing the market,’ people think that you’re commenting on an ability to predict the market price. What we do is recognize trends,” he said. “You can time the market — you can recognize short-, intermediate- and longer-term trends in the market. And it doesn’t mean you act on them. Depending on what your objectives are, we recognize these trends [and see how that affects the] probability [that a stock will or won’t continue to perform well].”

Looking at overall market trends is a necessary part of building and managing a retirement portfolio, Penna said.

“We don’t just buy and hold the stocks forever,” he said. “That’s how we manage the portfolio — by recognizing when those trends turn over. Investors should use a timing system that gets them in at the beginning of a rally and gets them out before their portfolio is killed as the market sells off.”

More From GOBankingRates


See Today's Best
Banking Offers