Investing and managing retirement income is a little bit like trying to get in shape.
Eliud Kipchoge-or just finish 26.2 miles-but focusing on performance is often a fool's game.
When certified financial planner Patti Brennan meets new clients, they ask them if they are "outcome driven," or "performance driven." Aimed at achieving their investment needs and risk tolerance. Those who are looking for a good match for a benchmark, usually the Standard & Poor's 500 index.
It's easy to understand why people get caught up in performance: Investors are inundated with news about the S & P 500 and other tallies of returns. When the market is going up 20% a year, a 10% return seems like a failure.
"It's one of those things where I tell people [who are performance oriented]" says Brennan, who is president of Key Financial in West Chester, Pa. If the goal is to keep up with the market, it says that means being able to ride out the inevitable declines.
Your Rate of Return
For several reasons, being performance driven For one thing, while a person is accumulating their retirement egg, their actual rate of return is likely to be the same as the market's over that period. "Even if you have 1
In other words, if you start the year with $ 1,000 and systematically put $ 500 a month into the account, even if you earn a 20% return calculated daily, you'll have about $ 7,800 at the end of the year. It is not quite the same as earning a 20% return on $ 7,000.
Meanwhile, the markets move up: Double-digit upside usually comes with a comparable downside. So what investors overlook is that 10% loss, for example, requires more than a 10% return.
Consider the difference between a $ 10,000 investment that averages a 10% annual return over three years and one that gains 30%, declines 10%, and bounces back 10%. A casual glance suggests the results should be the same. Yet the 10% steady return will be worth $ 13,310, says Brennan, while the more volatile option ends up at $ 12,870.
"After a 10% decline, she says, you need to make more than 10% the next year just to break even," she says.
And this is what an investor actually sticks with the program. Most people do not have it in them, as studies by Dalbar, a consulting firm, have shown year after year.
In 2018, Dalbar's research shows the average investor in an equity fund lost twice as much as the
S & P 500.
The average person took his money off the table because of poor timing.
Dollar Cost Ravaging
Being outcome-driven is particularly important in retirement. Averaging the strategy of investing at regular intervals, regardless of what is happening in the market. When they are high, the same dollar amount will not buy as many shares, but they will not pay more. It all averages out.
Blackrock has noted, calling the phenomenon "dollar cost ravaging." Because they are on their savings-not adding to them market declines take a much bigger toll.
Sticking With It
It turns out to be more than half of Brennan's new clients. Yet it has its challenges, especially when the stock market is blazing. "When they get their [portfolio] reports and they're underperforming the market, that's when the real stuff comes out," she says, noting that some of the more challenging points of her career have been during stock market booms.
"A good portfolio is like a garden," Brennan says. "When it's truly diversified, something is always in bloom."