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How Impatience Hurts Retirement Saving

Keep calm & carry on – it may be good for your portfolio.

 

Provided by MidAmerica Financial Resources

 

Why do so many retirement savers underperform the market? From 1993-2012, the S&P 500 achieved a (compound) annual return of 8.2%. Across the same period, the average investor in U.S. stock funds got only a 4.3% return. What accounts for the difference?1,2  

 

One big factor is impatience. It is expressed in emotional investment decisions. Too many people trade themselves into mediocrity – they react to the headlines of the moment, buy high and sell low. Dalbar, the noted investing research firm, estimates this accounts for 2.0% of the above-mentioned 3.9% difference. (It attributes another 1.3% of the gap to mutual fund operating costs and the remaining 0.6% to portfolio turnover within funds.)2

   

Impatience encourages market timing. Some investors consider “buy and hold” passé, but it has certainly worked well since 2009. How did market timing work in comparison? Citing Investment Company Institute calculations of equity fund asset inflows and outflows from January 2007 to August 2012, U.S. News & World Report notes that it didn’t work very well. During that stretch, mutual fund investors either sold market declines or bought after market ascents 57.4% of the time. In addition, while the total return of the S&P 500 (i.e., including dividends) was -0.13% in this time frame, equity mutual fund investors lost 35.8% (adjusted for dividends). 3

 

Most of us don’t “buy and hold” for very long. Dalbar’s latest report notes that the average equity fund investor owned his or her shares for 3.3 years during 1993-2012. Investors in balanced funds (a mix of stocks and bonds), held on a bit longer, an average of about 4.5 years. They didn’t come out any better – the report notes that while the Barclays Aggregate Bond Index notched a 6.3% annual return over the 20-year period studied, the average balanced fund investor’s annual return was only 2.3% .2

   

What’s the takeaway here for retirement savers? This amounts to a decent argument for dollar cost averaging – the slow and steady investment method by which you buy shares over time, a little at a time. When the market sinks, you are buying more shares as they have become cheaper – meaning you will own more (quality) shares when they regain value.

 

It also shows you the value of thinking long-term. When you save for retirement, you are saving with a time horizon in mind. A distant horizon. Consistent saving from a (relatively) early age and the power of compounding can potentially have much greater effect on the outcome of your retirement savings effort than investment selection.

 

Keep your eyes on your long-term retirement planning objectives, not the short-term volatility highlighted in the headlines of the moment.

    

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

 

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

    

Citations.

1 - finance.yahoo.com/news/p-fund-tops-p-500-142700129.html [5/3/13]

2 - marketwatch.com/story/7-reasons-why-retirement-savers-fail-2013-06-26 [6/26/13]

3 - money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/11/05/herd-behavior-hurts-fund-investors [11/5/12]

 

 

 

 

 


WHY IT IS WISE TO DIVERSIFY

WHY IT IS WISE TO DIVERSIFY

A varied portfolio is a hallmark of a savvy investor.

Presented by MidAmerica Financial Resources

     

You may be amused by the efforts of some of your friends and neighbors as they try to “chase the return” in the stock market. We all seem to know a day trader or two: someone constantly hunting for the next hot stock, endlessly refreshing browser windows for breaking news and tips from assorted gurus.

 

Is that the path to making money in stocks? Some people have made money that way, but others do not. Many people eventually tire of the stress involved, and come to regret the emotional decisions that a) invite financial losses, b) stifle the potential for long-term gains.

 

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes, even when some are clearly outperforming others.

 

#1: You have the potential to capture gains in different market climates. If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market's best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, or in one stock, its return is riding too heavily on its performance.   

 

So is diversification just a synonym for playing not to lose? No. It isn’t about timidity, but wisdom. While thoughtful diversification doesn’t let you “put it all on black” when shares in a particular sector or asset class soar, it guards against the associated risk of doing so. This leads directly to reason number two...

   

#2: You are in a position to suffer less financial pain if stocks tank. If you have a lot of money in growth stocks and aggressive growth funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

 

Diversification gives your portfolio a kind of “buffer” against market volatility and drawdowns. Without it, your exposure to risk is magnified.

 

What impact can diversification have on your return? Let’s refer to the infamous “lost decade” for stocks, or more specifically, the performance of the S&P 500 during the 2000s. As a USA Today article notes, the S&P’s annual return was averaging only +1.4% between January 1, 2001 and Nov. 30, 2011. Yet an investor with a diversified portfolio featuring a 40% weighting in bonds would have realized a +5.7% average annual return during that stretch.1

 

If a 5.7% annual gain doesn’t sound that hot, consider the alternatives. As T. Rowe Price vice president Stuart Ritter noted in the USA TODAY piece, an investor who bought the hottest stocks of 2007 would have lost more than 60% on his or her investment in the 2008 market crash. Investments that were merely indexed to the S&P 500 sank 37% in the same time frame.1

 

Asset management styles can also influence portfolio performance. Passive asset management and active (or tactical) asset management both have their virtues. In the wake of the stock market collapse of late 2008, many investors lost faith in passive asset management, but it still has fans. Other investors see merit in a style that is more responsive to shifting conditions on Wall Street, one that fine-tunes asset allocations in light of current valuation and economic factors with an eye toward exploiting the parts of market that are really performing well. The downside to active portfolio management is the cost; it can prove more expensive for the investor than traditional portfolio management.

  

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. We can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs.

      

MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com.

www.mid-america.us

    

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

   

 

Citations.

1 – usatoday30.usatoday.com/money/perfi/retirement/story/2011-12-08/investment-diversification/51749298/1 [12/8/11]





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