Dear Mr. Market:
The “fat lady is singing”, the alarm bells are ringing, and you are literally the last dunce in the room who decided to get into the market at the all-time high. Now Mr. Market shows you what real pain looks like and sells off like nobody has ever imagined.
Let us preface this article by stating it’s worth bookmarking and revisiting for those times when you may be rethinking your investment time horizon or just how much risk you truly are able to take on.
One of our pet peeves that we share in full transparency, is that most financial advisors are overly optimistic (or at least often present their case to you with that mindset). Why is that? Is it because they truly think the stock market will always go up? Is it because they’re pitching you a false bill of goods? Not always… but the little secret and reality behind this positioning is that YES…markets have always gone up over long periods of time. Financial advisors know that if you are true to your goals and disciplined to stay the course (in a proper asset allocation), you will get to the finish line. Sometimes their job is to talk you off the ledge but you won’t necessarily need that discussion or reminder if you go into battle with a little bit of education.
The real question comes down to your time horizon (not theirs) and your simple risk tolerance.
What if you don’t have a long time horizon? This question parlays into the second pet peeve we have with investment advisors who sometimes present an 80 year old client with stock market projections and returns going back to the Great Depression. Sorry…I don’t have 20 years to hope that the stock market recovered like it did after 1929! Yes…if you just retired at 65 you may need to gain some perspective and indeed see that you still actually should have/plan on a long time horizon and theoretically need to have your assets last at least 20 years so that you don’t outlive them. Conversely, if you are 80 but may not need any or all of your assets (i.e. plan to pass them on to your kids/estate), then perhaps it could make sense to look at a longer time span. The bottom line is this though…get to know yourself and your actual needs before jumping into any allocation.
Click here to read the article with some great charts over specific rolling time periods. When reading this article be sure to click/enlarge the chart graphic relative to your specific time horizon (One-year, Three-year, Five-year, 10-year, 15-year, and 20-year time frames)
If you don’t have time to read through the article linked above, here’s the skinny on the best and worst rolling time periods for the S&P 500:
One-year Worst = -42% Best = +61%
Five-year Worst = -6.6% Best = +30%
10-year Worst = -3% Best = +20%
15-year Worst = +3.7% Best = +20%
20-year Worst = +6.4% Best = +18%
Lastly, do not change your time horizon due to what the market is doing. For example, if you are indeed that freshly retired investor who just rolled over your 401k and were initially comfortable with a 15-year time horizon, don’t bail out if the market drops right out of the gate. As you hopefully saw from the charts, never once in history has the market not finished positive over a 15-year rolling time frame. (the worst ever return was still positive at +3.7%)
Cheers…and “stay disciplined to stay positive”!