Investing Means Tolerating Some Risk
When financial markets have a bad day, week, or month, discomforting headlines and data can
swiftly communicate a message to retirees and retirement savers alike: equity investments are
risky things, and Wall Street is a risky place.
All true. If you want to accumulate significant retirement savings or try and grow your wealth
through the opportunities in the markets, this is a reality you cannot avoid.
Regularly, your investments contend with assorted market risks. They never go away. At
times, they may seem dangerous to your net worth or your retirement savings, so much so that
you think about getting out of equities entirely.
If you are having such thoughts, think about this: in the big picture, the real danger to your
retirement could be being too risk averse.
Is it possible to hold too much in cash? Yes. Some pre-retirees do. (Even some retirees, in fact.)
Some have six-figure savings accounts, built up since the Great Recession and the last bear
market. They may feel this is a prudent move with the thought that a dollar will always be
worth a dollar in America, and that the money is out of the market and backed by deposit
insurance.
This is all well and good, but the problem is the earning potential. Even with interest rates
rising, many high-balance savings accounts are currently yielding less than 0.5% a year. The
latest inflation data shows consumer prices advancing 2.3% a year. The data suggests the
money in the bank is not outrunning inflation and may likely lose purchasing power over
time.
Consider some of the recent yearly advances of the S&P 500. In 2016, it gained 9.54%; in
2017, it gained 19.42%. Those were the price returns; the 2016 and 2017 total returns (with
dividends reinvested) were a respective 11.96% and 21.83%.
Yes, the broad benchmark for U.S. equities has bad years as well. Historically, it has had about
one negative year for every three positive years. Looking through relatively recent historical
windows, the positives have mostly outweighed the negatives for investors. From 1973-2016,
for example, the S&P gained an average of 11.69% per year. (The last 3-year losing streak the
S&P had was in 2000-02.)
Your portfolio may not return as well as the S&P does in a given year, but when equities rally,
your household may see its invested assets grow noticeably. When you bring in equity
investment account factors like compounding and tax deferral, the growth of those invested
assets over decades may dwarf the growth that could result from mere checking or savings
account interest.
At some point, putting too little into investments and too much in the bank may become a risk
– a risk to your retirement savings potential. At today’s interest rates, the money you are
saving may end up growing faster if it is invested in some vehicle offering potentially greater
reward and comparatively greater degrees of risk to tolerate.
Having an emergency fund is good. You can dip into that liquid pool of cash to address
sudden financial issues that pose risks to your financial equilibrium in the present.
Having a retirement fund is even better. When you have one of those, you may confidently
address the risk of outliving your money in the future.
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 cannot be invested into directly.
Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any
investment.
«RepresentativeDisclosure»
Citations.
1 - valuepenguin.com/average-savings-account-interest-rates [10/4/18]
2 - investing.com/economic-calendar/ [10/11/18]
3 - money.cnn.com/data/markets/sandp/ [10/11/18]
4 - ycharts.com/indicators/sandp_500_total_return_annual [10/11/18]
5 - thebalance.com/stock-market-returns-by-year-2388543 [6/23/18]