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." The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.
You learn how much volatility you can stomach. Across 1926-2014, the yearly total return for the S&P averaged 10.2 percent. If you want to be very casual about it, you could simply say that stocks go up about 10 percent a year, but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means if you add or subtract 20.2 from 10.2, you get the range of the index's yearly total return that could be expected 67 percent of the time. So, in any given year from 1926-2014, there was a 67 percent chance that the yearly total return of the S&P might vary from +30.4 percent to -10 percent. Some investors dislike putting up with that kind of volatility, others more or less embrace it.1
You learn why liquidity matters. The older you get, the more you appreciate being able to quickly access your money. Should you misgauge your need for liquidity, you can end up selling at the wrong time as a consequence.
You learn the merits of rebalancing your portfolio. The closer you get to retirement, the less risk you will likely want to assume. 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.
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 13 percent of the portfolio invested in just two Dow components? The investor just likes what those firms stand for or has worked for them. The inherent problem is the performance of those companies exerts a measurable influence on the overall portfolio performance.
You learn to be patient. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter. Your future and your quality of life may depend on realizing them.
John B. Kincaid may be reached at 928-284-3636 or firstname.lastname@example.org, www.kincaidfinancial.comSecurities and Advisory Services offered through Cetera Advisors LLC., Member FINRA/SIPC Cetera is under separate ownership from any other named entity.
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 the purpose of 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 - c.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]