moneyFYI
Financial Freedom Is Merely Organized Common Sense
Time and Tolerance Matter In Investment Strategy
Suppose you are 40 and thinking about retirement at 60. How long is your planning time frame?
20 Years?
Not really. Unless, of course, you expect to be dead before you are 61.
Your time horizon for investments should be the time you can expect to own them to meet income and security needs. If you are 40 now, that time is likely around 40 years if you are male and a few years more if you are female. It would not be unusual for one or the other of you to live to 90.
So?
People fear the stock market because it is highly volatile. It’s true if you look at one-year returns. On average, the S&P500 returns 10% or so, but with a standard deviation of about 16% if examined each year. Simplistically, that means one-year returns fall into a band stretching from -6% to +26% about 68% of the time. Not especially useful for predicting your future a year in advance.
If you need the money in a year, you should avoid the stock market.
But as you extend the time, the stock market becomes more predictable. For 30-year returns from 1955 to 2021 (starting with 1926), the worst return was slightly less than 8%, and the best was around 14%. The majority being close to 10%. 10% is a good investment return, and if it is reasonably predictable, better still.
Why should the stock market be frightening if you need the money in small pieces beginning 20 years from now? Most of it would be there for more than 30 years.
Why indeed?
Because people induce volatility by trading hunches, dropping out after a sharp fall, listening to pundits, cab drivers, and friends, and being caught up in the greed/fear emotional content of investing. If you own a large index fund, you likely get average results.
The trick is to know two things:
- Your time frame permits the big index investment approach.
- Your tolerance for short-term fluctuations. You don’t need any tolerance if you don’t look at the results very often.
As always, know yourself.
You might find this article of interest. Deconstructing stock market returns.
I build strategic, fact-based estate and income plans. The plans identify alternate and effective ways to achieve spending and estate distribution goals.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
moneyFYI 