Volatility, Market Timing, and Long-Term Investing
For many savers, the objective of a retirement account is to accumulate assets while you are working and use those assets to pay for your expenses during retirement. While you are in the accumulation phase, assets are usually invested and hopefully earn a sufficient rate of return to meet your retirement goal. For the majority,
Volatility, Market Timing, and Long-Term Investing
For many savers, the objective of a retirement account is to accumulate assets while you are working and use those assets to pay for your expenses during retirement. While you are in the accumulation phase, assets are usually invested and hopefully earn a sufficient rate of return to meet your retirement goal. For the majority, these accounts are long-term investments and there are certain investing ideas that should be taken into consideration when managing portfolios. This article will discuss volatility, market timing and their role in long-term retirement accounts.
“Market timing is the act of moving in and out of the market or switching between asset classes based on using predictive methods such as technical indicators or economic data” (Investopedia). In other words, trying to sell investments when they are near their highest and buy investments when they are near their lowest. It is difficult, some argue impossible, to time the market successfully enough to generate higher returns. Especially over longer periods. That being said, by reallocating portfolios and not experiencing the full loss during market downturns, investors could see higher returns. When managing portfolios over longer periods, this should be done without the emotion of day to day volatility but by analyzing greater economic trends.
So far, the stock market in 2018 has been volatile; particularly when compared to 2017. Below are charts of the S&P 500 from 1/1/2018 – 10/21/2018 and the same period for 2017.
Source: Yahoo Finance. Information has been obtained from sources believed to be reliable and are subject to change without notification.
Based on the two charts above, one could conclude the majority of investors would prefer 2017 100% of the time. In reality, the market averages a correction of over 10% each year and there are years the market goes up and there are years the market goes down. Currently, the volatility in the market has a lot of investors on edge, but when comparing 2018 to the market historically, one could argue this year is more typical than a year like 2017 where the market had very little to no volatility.
Another note from the charts above are the red and green bars on the bottom of each year. The red represent down days in the market and the green represent up days. You can see that even though there is more volatility in 2018 compared to 2017 when the market just kept climbing, both years have a mixture of down days and up days.
A lot of investors become emotional when the market is volatile but even in the midst of volatility and downturns, there are days the market is up. The chart below shows what happens to long-term portfolio performance if investors miss the best days in the market during that period.
Source: JP Morgan. Information has been obtained from sources believed to be reliable and are subject to change without notification.
Two main takeaways from the illustration above are; 1) missing the best days over a period in the market could have a significant impact on a portfolios performance, and 2) some of the best days in the market over the period analyzed came shortly after the worst days. This means that if people reacted on the worst days and took their money from the market then they likely missed some of the best days.
Market timing is difficult over long periods of time and making drastic moves in asset allocation because of emotional reactions to volatility isn’t always the best strategy for long-term investing. Investors should align their portfolios taking both risk tolerance and time horizon into consideration and make sure the portfolio is updated as each of these change multiple times over longer periods.
When risk tolerance or time horizon do not change, most investors should focus on macro-economic trends rather than daily/weekly/monthly volatility of the market. Not experiencing the full weight of stock market declines could generate higher returns and if data shows the economy may be slowing, it could be a good time to take some “chips off the table”. That being said, looking at past down markets, some of the best days occur shortly after the worst days and staying invested enough to keep in line with your risk tolerance and time horizon could be the best strategy.
It is difficult to take the emotion out of investing when the money is meant to fund your future needs so speaking with your financial consultant to review your situation may be beneficial.
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
Target Date Funds: A Public Service Announcement
Before getting into the main objective of this article, let me briefly explain a Target Date Fund. Investopedia defines a target date fund as “a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal”. The specified period of time is typically the period until the date you “target” for retirement
Target Date Funds: A Public Service Announcement
Before getting into the main objective of this article, let me briefly explain a Target Date Fund. Investopedia defines a target date fund as “a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal”. The specified period of time is typically the period until the date you “target” for retirement or to start withdrawing assets. For this article, I will refer to the target date as the “retirement date” because that is how Target Date Funds are typically used.
Target Date Funds are continuing to grow in popularity as Defined Contribution Plans (i.e. 401(k)’s) become the primary savings vehicle for retirement. Per the Investment Company Institute, as of March 31, 2018, there was $1.1 trillion invested in Target Date Mutual Funds. Defined Contribution Plans made up 67 percent of that total.
Target Date Funds are often coined as the “set it and forget it” of investments for participants in retirement plans. Target Date Funds that are farther from the retirement date will be invested more aggressively than target date funds closer to the retirement date. Below is a chart showing the “Glide Path” of the Vanguard Target Date Funds. The horizontal access shows how far someone is from retirement and the vertical access shows the percentage of stocks in the investment. In general, more stock means more aggressive. The “40” in the bottom left indicates someone that is 40 years from their retirement date. A common investment strategy in retirement accounts is to be more aggressive when you’re younger and become more conservative as you approach your retirement age. Following this strategy, someone with 40 years until retirement is more aggressive which is why at this point the Glide Path shows an allocation of approximately 90% stocks and 10% fixed income. When the fund is at “0”, this is the retirement date and the fund is more conservative with an allocation of approximately 50% stocks and 50% fixed income. Using a Target Date Fund, a person can become more conservative over time without manually making any changes.
Note: Not every fund family (i.e. Vanguard, American Funds, T. Rowe Price, etc.) has the same strategy on how they manage the investments inside the Target Date Funds, but each of them follows a Glide Path like the one shown below.
The Public Service Announcement
The public service announcement is to remind investors they should take both time horizon and risk tolerance into consideration when creating a portfolio for themselves. The Target Date Fund solution focuses on time horizon but how does it factor in risk tolerance?Target Date Funds combine time horizon and risk tolerance as if they are the same for each investor with the same amount of time before retirement. In other words, each person 30 years from retirement that is using the Target Date strategy as it was intended will have the same stock to bond allocation.This is one of the ways the Target Date Fund solution can fall short as it is likely not possible to truly know somebody’s risk tolerance without knowing them. In my experience, not every investor 30 years from retirement is comfortable with their biggest retirement asset being allocated to 90% stock. For various reasons, some people are more conservative, and the Target Date Fund solution may not be appropriate for their risk tolerance.The “set it and forget it” phrase is often used because Target Date Funds automatically become more conservative for investors as they approach their Target Date. This is a strategy that does work and is appropriate for a lot of investors which is why the strategy is continuing to increase in popularity. The takeaway from this article is to think about your risk tolerance and to be educated on the way Target Date Funds work as it is important to make sure both are in line with each other.For a more information on Target Date Funds please visit https://www.greenbushfinancial.com/target-date-funds-and-their-role-in-the-401k-space/
About Rob……...
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.
Do Trusts Expire?
Do trusts have an expiration date after the death of the grantor? For most states, the answer is “Yes”. New York is one of those states that have adopted “The Rule Against Perpetuities” which requires all of the assets to be distributed from the trust by a specified date.
Do trusts have an expiration date after the death of the grantor? For most states, the answer is “Yes”. New York is one of those states that have adopted “The Rule Against Perpetuities” which requires all of the assets to be distributed from the trust by a specified date.
The Rule Against Perpetuities
For most states, the trust assets have to be distributed no later than the “lifetime of those then living plus 21 years.” In other words, the trust asset must be distributed 21 years after the death of the youngest beneficiary listed in the trust document. For example, if I setup a trust with my children listed as beneficiaries, after my passing the trust assets would have to be distributed no later than 21 years following the death of my youngest child.
Per Stirpes Beneficiaries
Some trust documents have the children listed as beneficiaries “per stirpes”. This mean that if a child is no longer alive their share of the trust passes to their heirs. In many cases their children. If the beneficiaries are listed in the trust document as per stirpes beneficiaries then you may be able to make the argument that the “youngest beneficiary” is really the grandchildren not the children which will allow the trust to retain the assets for a longer period of time. Typically trusts do not allow the perpetuity rule to extend beyond their grandchildren.
Consult An Estate Attorney
Trust can be tricky and the language in a trust document is not always black and white, so it’s highly recommended that you consult with an estate attorney that is familiar with the estate laws for you state of residence and can review the terms of the trust document.DISCLOSURE: The information listed above is not legal advice. For legal advice, please consult your attorney.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
