A new perspective
Hurricanes, the war in Ukraine, interest rate hikes, and rising oil prices can all contribute to market volatility. Now more than ever, it is important to stick to your plan. Moving into lower risk investments because values are dropping might make you feel better, but it could derail your progress over the long term and have the opposite effect.
Reviewing your plan to see if you are on track
I would like work with you to revisit your goals and gain some new perspective.
Together, we can create a projection of your plan that accounts for all the variables. We can match up your willingness to take risk and balance that out with the realities of your own financial situation.
This simple process will help us confirm that you are saving the right amount of money and taking the right amount of risk to reach your goal.
This makes it easier to know that you are on track to have what you need when you need it. It allows you to ignore the ups and downs of the markets and sleep well knowing that you’re still on track to meet your ultimate target.
It makes it easier to stick to your plan.
In the meantime, please read on to get an idea of some of what we would discuss as we review your plan.
When you invest your money for the long-term, there will be good years and bad, but the focus should be on the end goal. In other words, instead of trying to see investing as simply trying to make as much money as possible on any given day, we’re really trying to arrive at a set target in the future.
We can take a look at the parameters related to meeting your target. Defining those parameters are quite straightforward and they can help guide our decisions (and our reactions to what is happening in the markets day-to-day).
It is a calculation based on:
1. How much you currently have saved?
2. How much you will need in the future?
3. How much more you can save on a regular basis?
4. How much time you have to reach your target?
5. How much can we assume your portfolio will grow over time?
The last piece of the calculation is determining what rate of return you need in order to reach your target.
Try this retirement calculator
Visit this retirement calculator to see how all of the parameters of your plan are related. For example, it can show you what happens if you reduce the amount of money you save each month; you will have to either achieve a higher rate of return, retire a few years older, or live on less when you retire.
The rate of return you are trying to achieve is part of that equation. When we separate the variables we lose sight of the plan. No one likes to see their money go down in different market cycles. But if we avoid the short term volatility we cannot assume the rate of return will not be affected.
There is no guarantee when it comes to rate of return. But we can look to historical returns as a guide.
Are you taking on too much risk? Or maybe not enough?
As we review your plan, we will also take a close look at the risk you need to meet your goals.
If you need an 8% rate of return in order to achieve your financial goals over the long-term, and you have chosen a low risk investment that has historically paid 4%, we have a problem. You will not earn enough to hit your target without either taking on more risk, increasing the amount you put away, retiring later or with less money.
The opposite scenario is also possible. You may only need 4% to reach your target, but you are invested in funds that historically make 6%. You may not want (or need) to take on that level of risk anymore.
Try this volatility calculator
An investment portfolio is a mix of equity and bonds. The more equity you own, the greater the volatility but the greater the potential for rate of return.
At the same time, the longer you remain invested, the more predictable your returns become and the more opportunity you have to take risks. I encourage you to give this volatility tool a try.
We also need to think about inflation
The perception is that there is no consequence to not taking risk with your investments. But in fact, not taking risks creates its own risk. Inflation erodes your purchasing power.
Imagine you invested your money in a diversified aggressive portfolio. We know that the value of the investment would go up and down and be subject to a lot of volatility. Over time, the value of this investment would grow to a point that your original investment is no longer at risk. You have taken the risk while you are in your income earning years.
If you choose to take the safest investment – for the sake of this example, holding your money in cash, – you are completely insulated from volatility. Your money is safe, and will not fluctuate in value. The issue: Your safe investment is not growing and therefore not keeping pace with inflation. You are exposed to an infinite risk of loss of purchasing power.
I am not suggesting you invest in an aggressive portfolio. Somewhere in the middle is likely appropriate. You either take risk early or other risks will persist. Let’s take some time to discuss and review your plan!