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As an investor, it can be difficult to see the stock market moving up and down, which is what we call volatility. However, the alternatives are either not saving at all or moving into a fixed product that earns a static rate of return. This would mean that once you subtract inflation and taxes, many times your real or “net” rate of return may be minimal or even negative. More importantly, it may be unable to sustain the growth you need for your retirement years. Regardless of whether you are 25 or 75, we have data showing that growth is still important in your portfolio. This means you will need to take some short-term risk in order to reduce your long-term risk. What does that mean? Here is an example: a very conservative portfolio earning only 3% may calm your nerves and seem like less short-term risk as compared to an aggressive growth portfolio averaging 7%. However, if you invested $100,000 today with a 30-year lifespan (even if you are in your 60’s this is a likely lifespan) you would have approximately $245,684 with a 3% return. However, although the short-term risk will be higher in the aggressive 7% growth portfolio, you would have approximately $811,649 over that same period. This means you have less long-term risk, or better said, less chance of running short of money to fund your retirement goals, needs and objectives.
We have provided a chart with data we received from Dimensional Fund Advisors, one of the world’s largest mutual fund providers. The chart shows there were 8 periods where the S&P 500 dropped 20% or more from 1926-2016. It also shows the number of months it was down; you will see this is red. The key point to the chart is that it shows the returns of the S&P 500 following those downturns. For example, following a 30% drop over three months in 1987, the market returned 815% over the following 153 months. But the main point is, you had to stay invested. If you sold off or changed your portfolio it is likely you would have missed most, if not all, of that return.
The reason we put a retirement plan in place is to account for market ups and downs. In other words, volatility is already factored into your plan. We are also prepared for years of double – digit increases. Making emotional changes to your plan due to the stock market volatility and emotion is one of the worst things you can do as an investor, but we do realize the concern. If you still have some fear and anxiety about the markets, we highly recommend you contact your advisor at once for a phone call or face – to – face meeting. Again, we are not going to recommend abrupt changes to your portfolio but as markets move, your investment advisory team will be rebalancing to take advantage of equity prices and keep your portfolio allocated based on the plan you and your advisor agreed upon.
The best news is that while the recent headlines would have you believe that the market is down, the S&P 500 is actually up 9.8% since January. This is why we ask you to “tune out” all the noise and enjoy your life.
This article was written by Robert Young, a Glendale-based financial professional and Chartered Retirement Planning Counselor® with One2One Wealth Strategies. Questions? Call (623) 850-0016.
Representative is registered with and offers only securities and advisory services through PlanMember Securities Corporation, a registered broker/dealer, investment advisor and member FINRA/ SIPC. 6187 Carpinteria Avenue, Carpinteria CA. 93013, (800) 874-6910. One2One Wealth Strategies and PlanMember Securities Corporation are independently owned and operated. PSEC is not responsible or liable for ancillary products or services offered by One2One Wealth Strategies or this representative.
The above example(s) mentioned in this article hypothetical and for illustrative purposes only. Please note that each person’s situation is different. Please consult your financial or tax professional regarding your circumstances.
Investors cannot invest directly in indexes.
The opinions expressed in this article are for general information only and are not intended to provide specific investment advice or recommendations for any individual. The views expressed are those of the author and may not necessarily reflect those held by PlanMember Securities Corporation (PSEC). Material presented is believed to be from a reliable source and PSEC makes no representation as to it accuracy or completeness.