Myth #1: As long as the stock market continues to have more “up” years than “down” years my investments are safe. In fact, since the stock market crash of 1927, the stock market has had 67 up years, and only 24 down years.
Fact #1: The magnitude of the gain or loss is more important than the mere fact that it was up or down. It is important to note that the size of a loss is greater than the same magnitude gain. For example, if a $100,000 investment lost 50% of its value at the end of year one, it would be worth $50,000. Then the following year the same investment gained 50%, it would only be worth $75,000 not its original $100,000. Even though its loss and gain were the same magnitude. Therefore, when annual returns are “averaged” by adding the losses and gains, then dividing by the numbers of years you have had your investment, it is not a true indication of how well the investment has performed, because, using the example above, the net result of a 50% loss and a 50% gain would equal 0, and your investment should therefore be at $100,000 not $75,000.
Myth #2: Market timing strategies may cause you to miss the best days in the market and therefore limit your potential gains. One often sees or hears that the negative effect of missing “just the best 10 days” will have on an investment.
Facts #2: This myth actually has some validity, but for the wrong reason. In truth, as illustrated above, missing the 10 worst days, would have a far greater effect. The point is that most successful investors take a long time horizon approach to investing. Trying to “time” the market by buying or selling in anticipation some expected high or low usually results in chasing the market and missing both targets to the expense for your investment.
Myth #3: The returns of the market are the key factor to building a safe retirement portfolio.
Facts #3: While market returns enhance one’s portfolio, the systematic contributions to your investment over time are the key components to a successful investment strategy.
Myth #4: There is no need to prepare for recession unless or until I see signs of one. Financial news is like any other news source today, if you try hard enough, you can hear anything you want to hear. Someone once quoted, “all the weathermen and all the economists in the United States could change jobs and no-one would notice”. Meaning, they both seem to be operating at chance.
Facts #4: Recent events have shown us that it is impossible to predict the market. Many pundits shouted that the market would be devastated if Trump was elected. In fact, the Dow futures dropped about 800 points following the announcement that Trump won, followed by an unpresented gain starting the following day and continuing to the present. However, with the way the world is today, who can tell what will happen tomorrow. And again, the prudent investor will implement a strategy that will incorporate safeguards against possible reverses in the market.
Myth #5: My investment portfolio is diversified, I have a variety of stocks, or mutual funds. We all agree that diversification is important.
Facts #5: If all your investments are in similar investments, are you truly diversified? Similar investments usually follow similar market trends. To truly diversify an investor needs to look to different risk pools. In other words, don’t put all your investments in the same asset class.
In summary, smart retirement investing begins with sitting down with a financial advisor to discuss your specific situation, goals, and desires to map out a plan. And most important, to get started. The earlier you start, the easier it is. Feel free to contact me at (909) 714-1830 or firstname.lastname@example.org for a complimentary consultation on starting and/or reviewing your retirement investing,