Key
lessons for retirement savers.
Provided by Taylor McClish
You learn
lessons as you invest in pursuit of long-run goals. Some of these lessons are
conveyed and reinforced when you begin saving for retirement, and others, you
glean along the way.
First and
foremost, you learn to shut out much of the “noise.” News outlets take the
temperature of global markets five days a week (and on the weekends), and
economic indicators change weekly or monthly. The longer you invest, the more you
learn that breaking news can create market volatility. While the day trader
sells or buys in reaction to immediate economic or market news, the
buy-and-hold investor has a long-term perspective and understands that the market
can have periods of volatility.
You learn
how much volatility you can stomach. Market
sentiment can quickly shift and so can index performance. Across 2008-18, the
S&P 500 had a cumulative total return (dividends included) of almost 140%,
compared to just 8% for the MSCI Emerging Markets Index. During 2003-07,
though, the Emerging Markets index returned 391%, while the S&P returned
83%.1,2
Here are the recent yearly total returns of the S&P: 2013, +30.71%;
2014, +13.57%; 2015, +1.30%; 2016, +11.94%; 2017, +21.83%; 2018, -4.38%. Do you
see any kind of “norm” or pattern there? That is the kind of year-to-year
volatility that leads people to find an asset allocation that is comfortable
for them.2,3
You learn
why liquidity matters. The older you get, the more you appreciate being able to quickly
access your money. A family emergency
might require you to tap into your investment accounts. An early retirement
might prompt you to withdraw from retirement funds sooner than you anticipate. Should you misgauge your
need for liquidity, you could find yourself under sudden financial pressure.
You learn
the merits of rebalancing your portfolio. To the neophyte investor, rebalancing when the bulls are stampeding may
seem illogical. If your portfolio is disproportionately weighted in equities,
is that a problem? It could be.
Across a sustained bull market, it is common to see your level of risk
rise parallel to your return. When equities return more than other asset
classes, they end up representing an increasingly large percentage of your
portfolio’s total assets. Correspondingly, your cash allocation shrinks.
The closer you get to retirement, the less tolerant of risk you may
become. Even if you are strongly committed to growth investing, approaching
retirement while taking on more risk than you feel comfortable with is
problematic, as is approaching retirement with an inadequate cash position. Rebalancing
a portfolio restores the original asset allocation, realigning it with your
long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and
buy “losers” as an effect of rebalancing, but as you do so, remember that you
are also saying goodbye to some assets that may have peaked, while saying hello
to others that might be poised to rise.4,5
You learn not to get too attached to
certain types of investments. Sometimes
an investor will succumb to familiarity bias, which is the rejection of
diversification for familiar investments. Why does he or she have 9% of their
portfolio invested in just two Dow components? Maybe the investor just likes
what those firms stand for or has worked for them. The inherent problem is that
the performance of those companies exerts a measurable influence on overall
portfolio performance.
Sometimes you see people invest heavily in sectors that include their
own industry or career field. An investor works for an oil company, so they get
heavily into the energy sector. When energy companies go through a rough patch,
that investor’s portfolio may be in for a rough ride. Correspondingly, that
investor may have less capacity to tolerate stock market risk than a faculty
surgeon at a university hospital, a federal prosecutor, or someone else whose
career field or industry will be less buffeted by the winds of economic change.6
You learn to be patient. Time teaches you the importance of investing based on
your time horizon, risk tolerance, and goals. The pursuit of your long-term
financial objectives should not falter. Your financial future and your quality
of life may depend on realizing them.
Taylor McClish may be reached at (503) 239-3060 or Taylor.McClish@cunamutual.com
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates. This
information has been derived from sources believed to be accurate. Please note
- investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for
avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Citations.
1 - etf.com/sections/features-and-news/swedroe-investing-uncomfortably?nopaging=1
[12/31/18]
2 - The performance data quoted herein
represents past performance and does not guarantee future results. Individuals
cannot invest directly in an index. Investing in securities involves risk of
loss that clients should be prepared to bear. No investment process is free of
risk; no strategy or risk management technique can guarantee returns or
eliminate risk in any market environment. Market volatility can dramatically
impact short-term investment performance. Current performance may be lower or
higher than figures shown. An investment’s return and principal value will
fluctuate so that an investor’s shares, when redeemed, may be worth more or
less than their original cost.
3 - indexologyblog.com/2019/02/04/sp-500-performance-in-2018-how-much-does-size-matter/
[2/4/19]
4 - Neither asset allocation nor
diversification can eliminate the risk of fluctuating prices and uncertain
returns. All investment strategies have the potential for profit or loss.
Changes in investment strategies, contributions or withdrawals, and economic
conditions may materially alter the performance of your portfolio. There are no
assurances that a portfolio will match or exceed any particular benchmark.
5 - Tax loss harvesting is not
suitable for all investors. Nothing herein should be interpreted as tax advice,
and the author of this article does not represent in any manner that the tax
consequences described herein will be obtained, or that any investment product
will result in any particular tax consequence. Please consult your personal tax
advisor as to whether tax loss harvesting is a suitable strategy for you, given
your particular circumstances. The tax consequences of tax loss harvesting are
complex and uncertain and may be challenged by the IRS. You and your tax
advisor are responsible for how transactions conducted in your account are
reported to the IRS on your personal tax return. The author assumes no
responsibility for the tax consequences to any client of any transaction.
6 - Because of its narrow focus, a
sector investing strategy tends to be more volatile than an investment strategy
that is diversified across many sectors and companies. Sector investing also is
subject to the additional risks that are associated with its particular
industry. Sector investing can be adversely affected by political, regulatory,
market, or economic developments.