Q: The market just finished a very strong year and I’m feeling a little nervous that the bottom might fall out. Should I take my profits and move to the sidelines?
A: I understand why you might feel nervous. Even casual investors know that market rallies don’t last forever. However, if you want to be a successful long-term investor, you need to settle your mind on one very important principle: time in the market is more important than timing the market.
Most of us remember the market meltdown in 2008. Some of us remember other market debacles. Since my first job as a government bond trader in 1986, I have experienced the dot com bust in 2000, the Russian crisis in 1998, the Asian crisis in 1997, the Mexican peso crisis in 1994 and Black Monday in 1987. During each crisis, many people sold their stocks and ran for cover. Those who did eventually regretted it.
Since the bottom of the 2008 financial crisis, the S&P 500 has advanced nearly 300 percent, excluding dividends—an average annual gain of nearly 16.9 percent. Since Black Monday on October 19, 1987, the Dow Jones Industrial Average is up 1,354 percent, or roughly 9.25 percent per year. Similar stories can be told about the recovery from other market crises.
Try to remember that markets favor the long-term investor. Those who try to side step market corrections may avoid some painful downturns, but they almost always miss the market’s upside. While they wait for the optimal re-entry point, the market rallies right past them and they are left on the sidelines wondering how to catch a moving train.
A much better approach is to settle on a long-term strategy and then stick to it. Don’t worry about the market’s ups and downs. A well-diversified portfolio of high quality investments will be strong enough to withstand market downturns and deliver compelling returns over time.
Q: I have always been a long-term investor, but now I am approaching retirement. Should I switch to a more conservative portfolio?
A: Retirement planning is tricky business. Most people have an innate understanding that shorter time horizons usually call for more conservative investments. But don’t fool yourself. Even though you are close to retirement, you still have a lot of life ahead of you. You need to make sure your investment horizon incorporates accurate assumptions about your longevity.
According to the Social Security Administration, a male age 65 has a 22 percent likelihood of living to be at least 90 years old, while a 65 year-old female has a 34 percent chance of living to age 90. If you are married, there is a 49 percent chance that one of you will live to be 90 years old. Therefore, when it comes to retirement around age 65, you should plan with at least a 25 year horizon in mind.
At the same time, you must consider some near-term realities. How much income will you need in each of the first five years? That money should be invested in short-term bonds or CDs with maturities roughly matching the periods when you will need the money. As your horizon lengthens, you should add more equities to the portfolio to cover longer-term periods. You can also add a qualified longevity annuity contract to help assure adequate income for the far distant years.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.