Does Time REALLY Reduce Risk? Don’t bet on it.

A VPN is an essential component of IT security, whether you’re just starting a business or are already up and running. Most business interactions and transactions happen online and VPN

You’ve seen this chart.  Advisors have been using it – or something like it – with clients and prospective clients for years.   It’s supposed to educate you.

It doesn’t.

Image_Rolling Period Returns_001

The chart is designed to address the issue of risk by showing that it’s time, not timing, that reduces risk for the investor.  After all, as you can see, a 50-50 stock and bond portfolio might go down 15% if held over one year; but, should expect a ‘downside’ risk of +5% if held twenty years.

While it may be true that the volatility of long-term outcomes may be reduced, it actually means little in the real world.

Patrick Kelly, in his book The Retirement Miracle, talks about the story of Tom who had been contributing to his 401(k) plan for years, riding the market ups and downs, and finally feeling good about the $2.5 million he’d accumulated in November, 2007 on his 64th birthday as he looked forward to retiring the following year.

On the day he planned to retire in November 2008, he walked into the office finding a lot of commotion.   During the next three days his $2.5 million was at $2.2 million.  By October 7th, it was down to $1.5 million – down about $1 million in 12 months.  His dreams of traveling with his wife had gone up in smoke.

The chart above didn’t let him know that when you’re one year away from retirement, you aren’t looking at the 20-year data anymore; it’s the one-year data that may be more relevant.

Now, obviously, the 2008 market meltdown was an extremely rare occurrence, and one arguably caused as much by (and that’s being generous) elected officials as anything Wall Street did; but, the lesson is no less worth learning:  Managing the downside becomes critical as time passes and we get closer to the time we begin to draw-down on assets.

‘Nuff said.

 

You can begin your planning here!   Let me know if I can help.

Jim

————————————

Interested in becoming an IFG client?  Why play phone tag?  Schedule your 15-minute introductory phone call!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Search
Jim's picture
Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor. He is also licensed for insurance as an independent agent under California license 0C00742.

Schedule Your
20-Minute “Right Fit” Introductory Call Now!

Recent Posts

Archives

Schedule Your 20-Minute
“Right Fit” Introductory Call Now!