The Risk of Not Investing

Couple with financial advisor

Since the turn of the century, we’ve been reminded of one of the risks of investing – the risk of market declines. Although market declines can’t be prevented, buying quality investments and diversifying your portfolio can help you experience less volatility and show more consistent performance over time.

It’s all about income

Whether it is 10 years or 40 years away, retirement is probably one of your long-term financial goals. And your investments will need to provide income when a job no longer does. So how much money do you need? The rule of 25 is a quick rule of thumb. Take the amount of money you need from your portfolio each year and multiply that number by 25. That’s about how much you'll need your portfolio to be worth when you retire.

You can’t meet long-term goals with short-term investments

An appropriate amount of market risk may be necessary because it’s difficult to meet long-term goals with only short-term investments. The most quoted “rule” of investing – the “Rule of 72” – illustrates this point. Take 72 and divide it by your expected return, and that’s about how long it will take your money to double. Therefore, earning a 7% return will take just over 10 years to double, while a 3% return will take nearly 24 years, and a 1% return will take nearly 70 years to double.

Rule of 72
  Average Annual Return
  Years to Double

Source: Edward Jones estimates. The Rule of 72 is a general rule of thumb that is for illustrative purposes only. It assumes a constant rate of return.

So what can investors do?

Focus on the long-term. Typically, market declines are not what derail our investment strategy – it’s our reactions to those declines. While stocks certainly can be volatile in the short-term, the long-term trend for stocks has been positive. And to increase the diversification of your portfolio, we recommend holding some of your portfolio in fixed-income investments. Your specific mix of stocks and bonds will be driven primarily by your unique financial goals, comfort with risk and retirement timeline.

Be disciplined.To reach your goals, it’s important to remain focused and adhere to your long-term strategy.

Use market declines to your advantage. Consider investing a set amount every month, regardless of what the market is doing, to help take emotions out of the equation. This strategy can help turn market declines into opportunities. Since they will be investing through these declines, disciplined investors have the opportunity to “buy low.”

Remember why you’re investing

Any time you go through periods of market fluctuations, it’s important to remember why you’re investing – to reach your financial goals. Although investing poses risks, such as the risk of declines, not investing also can be a risk to your financial future. The key is finding balance – taking on an appropriate amount of risk to ensure you have enough growth potential to reach your long-term goals. Talk to your financial advisor today to keep your investment strategy on the right track.

Important information:

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.

Past performance does not guarantee future results.

More resources:

What You Need to Know About Asset Allocation

The best asset allocation is one that is designed to help you reach your financial goals.

How Much Risk is Right for You?

Risk is a normal part of investing that can actually be beneficial and serve a valuable purpose.

Know Your Route: 10 Rules of the Road for Investing

Your investment goals are as unique as the route you take to reach them. But regardless of your course, we believe these 10 “rules of the road” can help you get where you want to be.

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