In our inaugural blog post for The Fiduciary Advisor, we discussed how the risks of the American retirement crisis call for fiduciary advice — financial guidance that puts investor needs first by law. In this post, we'll explore investment risk in more detail. Investment risk can be thought of as simply the risk that an investment's actual return will be different than expected. As investment decisions have largely shifted from professional pension managers to individuals, this is often the greatest risk to comfortable retirement.
Distractions, distractions, distractions
Individual investor emotions often lead to irrational investment decisions. Legendary investor Benjamin Graham said it best: "The investor's chief problem — and even his worst enemy — is likely to be himself." A close second is probably the big bank financial "advisor" who in reality is just a salesperson with no fiduciary duty, incentivized to sell vaguely "suitable" products. Financial entertainment media such as CNBC often makes matters worse, distracting investors with histrionic stories of day-to-day market movements.
The cost of reacting to the markets
During our recent 2014 Halftime Market Review webinar, we looked at how reacting can hurt performance by examining the growth of $1,000 dollars over a 44-year period. This has been a hot topic with our clients as the market recently hit an all time high and inspired a new round of questions about market timing. On the webinar, we showed that $1,000 fully invested in the S&P 500 Index 1970-2013 grew to almost $78,000. Reacting to market moves and missing only a few days of strong returns can have a huge impact on performance. Miss just 5 of the best days in the market over 44 years and investment performance drops by more than a third to just over $50,000. Miss 15 of the best days and lose more than half your potential return to end up with less than $30,000.
The most powerful force in the universe
Time horizon is everything. Ask yourself what your time period is and keep in mind that John Hillman's father in-law is 96 years old and still with us. Consider the fact that the 70's and 00's were lousy decades for stock investors. So two of these four decades were not impressive, yet $1,000 still grew to almost $78,000. This solves a lot of financial problems. It's no wonder that Albert Einstein described compound interest as the most powerful force in the universe.
Fiduciary financial planning
The lesson — stay the course with your stock allocation assuming you've done your financial planning homework. If you haven't, it's never too late to start. View our Fiduciary Financial Planning webinar to learn more or contact us to discuss ways to get started.
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