Why Being Too Conservative at Investing Can Prevent You From Having the Kind of Retirement You Want

Retirement is the ultimate goal for most people, most of us already have a vision early on of what we want retirement to be like for us.  Therefore, for years we strive and work hard at doing what we think are the “right things” that will put us in place of retiring when and the way we want to: with little to no changes in our lifestyle and, hopefully, be able to sustain that lifestyle for the rest of our lives without having to go back to work, unless we choose to do so.

Given the increasing costs seniors face once they stop working (i.e. housing, transportation, and healthcare to name just a few), it’s more crucial than ever to start saving for retirement early on. But saving early is only half of the equation, an equally important component is choosing the right investments to allow your money to grow, and with that comes choosing an investment approach that is in line with your goals and risk tolerance and to understand the risk of either having it or not.  Often times and out of fear of losing the retirement they envision, some people prefer to “avoid risk” by not being in the market at all or by investing on safer investments (such as CDs); however, what they rarely understand is that all investing, as well as sitting on the sidelines, involves some levels of risk.  Depending on current market conditions and your specific financial situation, those risks may be higher than you think.  Let’s pull apart the misconception that being on the sidelines is less risky and won’t cause you to lose the money you have worked hard to retire on.

  1. There is no risk if you are out of the market? Being out of the market due to fear or trying to time the market can lead to sub-par performance and prevent you from building the long-term wealth that will sustain you in retirement. Retirement can easily last over 25 years, retirees need to not only preserve what they have saved but also look for ways to continuously grow their savings or else, they face the real risk of outliving their savings.  It’s been over 10 years since the financial crisis of 2008 when the S&P 500 Index, widely considered the “U.S. market” dropped nearly 40%, causing investment portfolios, retirement accounts and even college funds to lose more than one-third of their value. Nervous investors sold out at the bottom to cut their losses and many never returned to the market, by doing so, they not only locked in their losses, but they also missed out on one of the longest market recoveries in history. From the market low of 677 on March 9, 2009, the S&P 500 increased 272% as of September 30, 2017.
  2. Investing in CDs in order to not lose money: Safety investments such as cash, CDs and U.S. Treasuries are the “go to” solution for super cautious investors. However, investing in CDs and U.S. Treasuries earning just 0.5% to 2.5 or 3%, depending on their maturity, bears the risk of your low returns not exceeding inflation, which will erode your future purchasing power.  In other words, your standard of living and what you can afford could easily be less in the future, especially with longer life spans. Being too conservative in your investments means that you will miss out on compounding and the ability to grow your money over the long term.  Based on time value of money tools, it’s easy to compare saving at 2% versus investing at 6%.  If you invested $1,000 per month for 30 years or $360,000, the ending value of that portfolio in 30 years would be $487,000 at 2% versus $949,000 at 6%.
  3. Trying to time the market does not work: The first thing to understand when investing is that market volatility is a normal component of investing. Despite average intra-year drops of 14.1%, the S&P 500 Index has had positive annual returns in 28 of 37 years or 75% of the time from 1980 through September 30, 2017.  If you try to time the market, you could easily miss the best days of the market- an investor who stayed fully invested in the S&P 500 from Jan 1, 1997 through Dec 31, 2016 had an average return of 7.7% despite two major market downturns. Had you tried to time the market and missed the 20 best days in the market, your average annualized return for the same 20 years would have been 1.6%. Worse, if you missed the 40 best days during this same time period, your return would have been -2.4%.

If you are sitting on the sidelines from the stock market or investing too conservatively, once you consider the impact of inflation and taxes, you will realize that you may actually be earning a negative real rate of return.  Your savings will not only lose value over time, but there’s a big chance you could outlive your retirement savings.

Risk is often times misunderstood and too often associated solely with volatility, many investors don’t realize that by avoiding what they deem are riskier investments, they are missing potential opportunities like buying assets at a discount or selling them at a premium.

It is very important to understand that risk is a necessary component of investment that can work to your advantage, if managed correctly.  The best defense against taking too much or too little risk in your investing is to have both, a well thought Financial Plan that is in line with your risk tolerance and financial goals, and a well-diversified portfolio.  Keep in mind that life, goals, and circumstances change; therefore, it is imperative that your Financial Plan gets revised regularly (at least once a year) in order to make sure that you are on the right track to achieve your long-term goals.

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This represents a partial list of clients. They have not been compensated and were not selected based on duration, performance, account size.