The Big Mistake

Actually, The Big Mistake can take many different forms, any of which can have a profound negative impact on your retirement plans.

For example, during the average two-person 30-year retirement, we can expect to lose about 60% of the purchasing power of our money just through the effects of inflation.  That’s right, 60%!  Many will invest heavily in bonds at retirement to be “safe.” Then, too late, they realize that, after taxes and other fees, bonds cannot compensate for the accumulated effects of inflation over the decades needed to fund their retirement (bonds have lower volatility, but about half the long-term returns of a diversified stock portfolio).

Another example, and perhaps more devastating, is the propensity to give into our emotions and not focus on long-term returns under the unrelenting urgent headlines of the financial media, especially during market downturns.  What do our emotions tell us to do?  Sell during market drops!  Then, after selling, there’s an even greater dilemma — when should we get back in?  Think about the great recession of 2008/09.  How many “timing” investors and advisors got this right? Over the past 35 years, the stock market has experienced an average drop of 14 percent at some point each year, but nevertheless had positive annual returns over 80 percent of the time.^[1]  Since 1989, an investor who was not in the market for just 15 of the best performing days missed about 40% of the market returns.^[2]  Because no-one can consistently forecast the market, the default solution (and the more profitable course in the long run) is to simply stay in the market.

But, you will never really know how tempted you will be to sell during a crisis until you’re in the middle of it.  Our goal is to help you stay the course though those times with diversity and discipline. In fact, the very profitable counter-intuitive action in a down market is to buy more shares while they are “on sale.”   We help prepare for market drops by providing a reserve of living expenses in fixed income, which allows maintenance of a diversified, rebalanced stock portfolio through downturns.  The market inevitably resumes its long-term, earnings-driven returns.  The essential point is to keep focused at least 10 years out, and not get scared into action by media-hyped short-term volatility.  This takes experience and a steady hand.

[1] https://www.fidelity.com/viewpoints/investing-ideas/strategies-for-volatile-markets
[2] Research from Dimensional Fund Advisors www.dfaus.com