"Don't ride the rollercoaster of the stock market, declare victory on your money."
A lot of times the stock market feels like a gamble. So many factors that determine the market and stock prices that even the best of financial professionals are unsure whether it is going to be a good or bad year in the stock market. This makes it increasingly difficult to plan around consistent income needed for retirement or stable returns as you near your retirement years. If you are in retirement or nearing your retirement age then a year like 2022 can be detrimental to your financial success.
Sequence of Returns Effect on a Portfolio
A common example that our firm likes to use that presents a rather simple illustration regarding the sequence of returns is this: "If you invest $100,000 and in Year 1 you have a negative 12% return, then the following year you have a positive 12% return. Then again in Year 3, you have a negative 12% to be followed with a positive return of 12% in Year 4. What will your money look like at the end of Year 4?"
Most of the time the prospective client will say that the account will be breaking even. When in reality, you will have a negative return on your money. A 12% loss on $100,000 (-$12,000 return) is a much greater loss then what you gain on a 12% positive return on $88,000 ($10,560 gain) which would put you at a total of $98,560. Ultimately, this would result in a 1.44% loss on your principal in 2 years. As you continue this trend of a rollercoaster on your money, you slowly lose money as time goes on.
Safe Strategy Investing
After seeing just, a simple example of how the sequence of returns in a volatile market can affect the integrity of someone's investment portfolio. Which becomes especially crucial nearing or at retirement. The stability and consistency of safe strategy investing seems much more appealing, not only to advisors but also to clients. There are strategies out there where you don't have to ride the rollercoaster of the stock market and can provide both safe but more consistent returns in your portfolio where it has much greater chance to grow in one direction. Which is upwards!
Written by: Eli Howard