Naked Truth Investing: Has anyone looked at the markets lately?
If you are investing for retirement, you should be focused on the long term. Your primary concern is the amount of money you will accumulate for your retirement.
It is easy to lose this focus when the steady drumbeat from the financial media if rife with predictions of financial doom and gloom.Our economy has serious problems. I have no idea whether the markets are headed for a precipitous decline or major gains. Nevertheless, given all the news about how terrible the markets have been, it might be helpful to have a reality check.
A reasonable asset allocation for many investors is 60% stocks and 40% bonds. This is the allocation used by most trust and pension funds.
If you had a globally diversified portfolio of low cost index funds with this asset allocation, you would have incurred a loss ranging from 1.5% to 2% year-to-date, depending on the mix of your funds. Not great, but certainly not worthy of all of the hand wringing about markets collapsing.
What if you held that portfolio for the previous five years? Your returns would have been between 12% and 13% on an annualized basis. You could well afford the losses you have incurred so far this year.
If you go back 10 years, you would have had an annualized return between 8% and 9%.
Investors would be well advised to look at market returns in historical context. If you have the right asset allocation, you can ignore short term volatility and focus on achieving your retirement goals.
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.