3 Things Retirement Investors Can Stop Worrying About
Reprinted courtesy of MarketWatch.com.
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Forget about the market. There are much more serious things that should worry you.
Investors are afraid, and who can blame them if they spend a lot of time following the financial media? Doomsday, it seems, is always just around the corner.
Interest rates. Oil. Ebola. Chinese hackers. Torture camps. The Fed. Democrats. Republicans. Global warming. You name it, somebody somewhere is probably convinced it’s the trigger that will collapse our economy and ruin our future.
But such media-hyped fears all too often blind today’s investors to the real threats to their financial well-being.
In short, we’re worried about the wrong things. Let’s look at three examples.
FIRST: Don’t worry about what the market is doing. Whatever is happening today or this week, something will soon come along and undo it. Unless we are on the brink of some sort of cataclysmic collapse, I can confidently promise you this: Five years from now, you won’t remember anything about this week’s market; it won’t mean a thing.
Instead, you should be worried about your portfolio and what will happen between now and the time you’ll need your money. Will your investments, over the long run, let you take advantage of the market’s upswings without letting the downswings derail you?
My experience tells me that most of us should indeed be worried about those two points. Most investors don’t understand proper asset-class diversification; as a result, they shortchange themselves out of long-term returns that they could easily achieve.
To take full advantage of the market’s upswings, you need to own many asset classes, not just the popular and easy-for-Wall-Street-to-sell large-cap U.S. stocks. Fortunately, this isn’t hard or expensive. To learn how (and why) to do this, check out one of the most important articles I’ve ever written, Six Steps to the Ultimate Retirement Portfolio.
Most investors should also be worried about the amount of risk they are taking. Short-term and medium-term market trends tend to seem “normal” and lead many people to think they’ll continue indefinitely.
The events of 2008 shocked many investors out of a sense of complacency that they shouldn’t have had in the first place. Many of them overreacted, bailing out, in effect shooting themselves in the foot by depriving their portfolios of an unexpectedly quick and long-lasting recovery.
To make sure that the market’s inevitable downswings don’t derail you, invest in the proper mix of fixed-income and equity funds. In an article from earlier this year, you will learn just how to do that.
When you’ve got these two aspects of your portfolio under control, you can truly afford to stop worrying about the market.
SECOND: Stop worrying about how you’re going to pay for that new iPhone 6 Plus or that Tesla or the boat you’ve been longing for—or your daughter’s extravagant wedding.
Instead, worry about the implications of your everyday financial actions, which will have vastly more impact on your future prospects. Specifically, worry about whether you are saving enough money to afford to retire someday.
The $7 a day you casually spend on lattes adds up to $50 a week, more or less. Over a year’s time, that’s about $2,500.
That’s only one small example. Wherever your own weak spot lies, think ahead 10 years. In the year 2024 I am quite sure you won’t regret that you gave up a few indulgences today. But you will wish that you had saved and invested the money instead—or you will be very glad you did that.
Americans are doing a poor job of saving for retirement. You’ve probably seen some of the same statistics I have. For example, among households headed by someone age 55 to 64, median retirement savings are only $100,000. Among households headed by 65- to 74-year-olds, the median savings drop to $77,000.
How much should you save? The best answer I know is simple: As much as you can, and as early as you can. In half a century of working with investors, I have talked to thousands of retirees who regretted that they hadn’t saved more when they could have. I can’t recall anybody who regretted having saved too much.
If you want to learn why this issue matters so much, this article is a good place to start.
THIRD: Don’t worry about whether you’re doing better than other investors and beating the market.
Let’s be blunt here. Beating the market is a sucker’s game. The returns of “the market” have nothing to do with you, nothing to do with what you need.
If you truly think that beating the market is your objective, there have been years (2008, for example) when you would logically have to brag to your family that you lost “only” 30% of your life savings. And there have been other years (1995, for example) when you would logically have to be downhearted that you gained “only” 30%. That is truly nuts!
It’s time to get real, folks. As the widely respected Dalbar study has shown again and again, most investors (including most mutual fund managers) don’t even match the returns of the market, let alone beat them.
Instead of worrying about whether you’re doing better than the market, you should be worrying about whether you’re doing as well as the market.
Fortunately, it’s neither expensive nor difficult to do as well as the market. The solution is to buy low-cost index funds, which are available in every major asset class that your portfolio should have. Earlier this year I wrote of 30 reasons that index funds can be an investor’s best friend.
To wrap this all up, if you stop worrying about the wrong things and instead apply your energy to doing the right things, I believe you can pretty much give up worrying altogether. You can safely ignore most of the financial news, regarding it as “noise” that isn’t going to do you many favors.
And if you do that, I’m pretty certain that your life will have less stress and more opportunity for enjoyment and accomplishment. You’ll have more money, too.
Richard Buck contributed to this article.