Focusing on the Long View in Investing
Daily market fluctuations are less important than your long-term outlook
If you only look at the last few years, investors have endured a roller-coaster ride in their retirement funds. But with a focus on the long view, investors are much more likely to see that short-term fluctuation is simply a part of investing and that the old rules of investing apply now as much as ever.
In the midst of uncertainty, investors who look past market volatility and focus on the overall stability and proven track record of mutual fund investing still enjoy significant returns over time. Reacting emotionally to market swings and trying to "time the markets" can result in buying stocks when the market is up and selling them when it's down--the exact opposite of a winning investment strategy.
In fact, it's critical to view all your retirement investments through a long-term lens. If retirement is still many years out on your horizon, then short-term market volatility should be much less of a concern to you. And even if retirement is around the corner or has already arrived, making rash decisions based on market volatility can have an adverse impact on your retirement savings.
The most important step to guarding against making short-term decisions based on fear is creating an investment plan that spells out your long-term goals and objectives as well as a strategy for how you'll achieve them. Such a plan provides a foundation for making decisions that goes beyond the daily ups and downs of the financial markets.
The long-term goal of a retirement plan is simple: to provide income when you're no longer in the workforce. But here are a few more specific questions to think about as you formulate your investment plan:
When would you like to retire, and how many years away is this?
The further away your desired retirement, the less impact short-term market fluctuations will have on your portfolio. So if you are in your 20s, 30s or even 40s, you might be better off just not following the daily or weekly movements of the financial markets if you are prone to making fear-based decisions, as long as you've taken the time to research your investments and have a clear understanding of their typical past performance.
Approximately how much money will you need to have saved when you retire in order to live the lifestyle you desire?
This is a hard question for most people to answer. One rule of thumb used by many investment advisors is to plan on needing about 80 percent of your preretirement income in order to maintain the same lifestyle in retirement.
But everyone is different, and you might need even more (or less) money than that typical rule-of-thumb 80 percent during retirement to live the lifestyle you want. For example, you might decide to work part-time or you may be viewing the sale of a home as part of an investment strategy that will provide additional funds during retirement.
How much money can you afford to contribute?
In 2011, you may contribute up to $16,500 a year to your 401(k) plan, or $22,000 if you will be 50 years of age or over before the end of the calendar year. Other investments may or may not have such thresholds. But it's important to balance your retirement saving plan with your financial present, so that you're not imbalanced toward retirement while not saving enough for the near term.
What is your level of risk tolerance?
In other words, how nervous do you get when the financial markets fluctuate and your investments lose value, at least in the short term? This will determine how you allocate your assets between more risky (common stocks and stock mutual funds) and less risky (savings and money market accounts) investment vehicles.
The most important thing to remember if you ever feel tempted to make a fear-based decision with regard to your retirement plan is this: investing for retirement is a marathon, not a sprint. Keep your eyes focused on the long-term goal and don't forget that the farther away your retirement, the more time you have to make up losses in the short term. If you'd like more information, don't hesitate to visit with us.