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By Jason Stipp | 09-10-2012 01:00 PM

Behavioral Best Practices for Pre-Retirees

Taking advantage of automatic investment plans, focusing on what you can control, and benchmarking your portfolio against your own goals (versus today's hottest picks) can help keep investors' retirement plans disciplined and on-track.

Jason Stipp: I'm Jason Stipp from Morningstar.

It's Retirement Readiness Week on This week we'll be helping pre-retired investors get hands-on with their portfolios. Of course, a big piece of that is not just which investments you buy, but when you buy them and how you think about your portfolio, so-called behavioral finance.

Here to offer some tips about behavioral best practices for pre-retirees is Morningstar's Christine Benz, our director of personal finance. Thanks for joining me, Christine.

Christine Benz: Jason, great to be here.

Stipp: We do know that investors can be their own worst enemies sometimes because of the way they think about investing or the behaviors that they engage in as they're investing. So, beyond just thinking about your actual investments, it's important to think about how you invest, and the practices you use.

On that front, you have a few tips for us today about how you can be on your best behavior, some ways to basically stack the deck in your favor. The first one has to do with those all-important retirement accounts and some easy tips that you can implement with those accounts to make sure you stay on track.

Benz: That's right, Jason. Retirement plan overseers have noticed that when participants are nudged in a certain direction, they tend to exhibit better behaviors. So, most 401(k) plans have a couple of options that you can switch on.

First of all, many 401(k) plans automatically opt participants in, and they have to opt out if they don't want to participate. So, that's something that participants often do, and it and often helps their results. You can further nudge yourself in the right direction by taking advantage of "auto escalation," which means that when you get a raise, your contribution to your 401(k) plan or your 403(b) plan or 457 automatically goes up. So, it's good to opt in to a features such as that to sort of take advantage of your natural tendency to maybe do nothing. It will help you exhibit better behavior.

Then there are also programs that automatically rebalance your account. So, left alone, your accounts will sort of drift to whatever has performed best, and that tends to increase the risk profile of your basket of investments. By selecting auto rebalance, periodically you're scaling back on those investments that have been performing really well, and you're tipping more money into those things that haven't done as well, which is actually a really good way to invest.

So, if you're investing within the context of a company retirement plan, those are some good features to check off when you first sign up. I would also say if you are contributing outside of the company retirement plan, also think about taking advantage of automatic investment programs, whereby you are contributing a fixed amount on a regular basis. It kind of takes that tendency to pull back on your investments when things aren't feeling so good about the market, and it overrides that tendency, and so you're putting money to work at a regular basis.

Stipp: It seems overall, a lot of these tips, getting auto-enrolled or enrolling in that 401(k) the first day you start your job, and getting that auto escalation implemented, really helps keep you disciplined as far as your investments.

So, if you're dollar cost averaging, you know that you're always going to be putting in a certain amount of money and that's going to help you especially when the market's doing poorly, when it's really hard otherwise to invest if you're not in that automated plan.

Benz: Exactly, exactly. It's just a good way to instill discipline in your investment program.

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