Considering Investment Risks
The U.S. markets have recently hit another all-time! Should you be celebrating… or worried?
Every year the list of “Reasons Not to Invest in the Stock Market,” originating in 1934, is updated. Market highs are a reoccurring theme throughout – others on this list had to do with legislation, politics, economies, or world disasters. Yet the “#1 Good Reason Why You Should” all boils down to about a 795,000 percent return over this time.
Bearing this in mind, perhaps you should consider entirely different risks. Ask yourself: why do you have money invested anyway? As an investor, it’s easy to get caught up in our individual investments and lose sight of our goals. That’s not to say that the analysis of individual investments isn’t important. There is no doubt it is. The coordination and correlation of all your investments is also important. However, none of this means a thing if sight of your goals is lost. The 20-year period ending December 31, 2011 was not the prettiest in market history, but the S&P 500 still returned an annualized 7.8%. An analysis done by Dalbar revealed the average investor over this same period earned only 2.1%. OUCH!
Perhaps the primary investment risk you should be concerned with is you. Are you emotionally attached to your money? If you are, it creates risk. But let’s just disregard you. Let’s talk about longevity risk, inflation, deflation, unexpected life events bearing unexpected costs, unplanned life changes (health, income, marital status, geography), taxes and interest rates.
For example: You planned that your investment portfolio would average 7%. Assume you do better than the average investor emotionally and almost double that return over your retirement with an annualized rate of 4% for the 75% of your portfolio that was invested. Then factor in the following:
Interest rates remained low and you averaged 1% on the 25% of your portfolio ‘CD money’ rather than the planned 3%. Your spouse became immobile and you had to bring in home health care to help at an unexpected out-of-pocket cost of $1,500 per month for 5 years. 10 years into your retirement your spouse passed prematurely and because of the loss of Social Security, you needed $8,000 more from your portfolio each year.
RESULT: Your 20-year retirement plan ran out in year 14.
That’s just one scenario. What if….
- You live 10 more years than you planned?
- The cost of living went up more than you planned?
- Taxes were higher than you planned?
Billy Cox said, “You can’t build a long-term future on short term thinking.” The market highs of last week will eventually be just a blip in history. Focus on the long-term—and your future.
*Past performance is not indicative of future results.