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 need your portfolio to be worth when you retire.
Difficult to meet long-term goals with short-term investments
Taking 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 about 24 years, and a 1% return will take more than 70 years to double.
The Rule of 72
Average Annual Return
|Years to Double Investment|
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 it 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. While working toward your goals, it’s important to remain focused and adhere to your long-term strategy.
Use market declines to your advantage. Consider systematic investing, which is 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 some of their investments during market declines.
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 market 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 Edward Jones financial advisor today to help keep your investment strategy on the right track.
Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.
Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.