Monday, September 5, 2011

Financial FICTION #7: Ignore the day-to-day gyrations associated with variable investments – you’ll end up well in the long run

Financial FICTION #7: Once you ignore the day-to-day gyrations associated with variable investments, you’ll end up well in the long run, when it matters most.

Any time the stock market plunges, you are sure to hear one explanation from conventional advisors: “Don’t panic. Focus on the long term.” That is to say that there’s supposedly a time called “the long term” which you will one day reach, and when you get there, your investments will do great and escape the day-to-day gyrations associated with variable investing.
I don’t need to tell you that’s not reality, do I? The reality that any honest, realistic financial professional knows and cannot deny is that the risks associated with investing directly in the stock market – whether via individual stocks or stock mutual funds – can NEVER be diminished and/or eliminated by anything, including the length of time you’ve been investing. To imply otherwise is completely bogus.

Let’s say the stock market plummets, and mutual fund A’s value drops by 10 percent. Jim’s investments in fund A would experience a 10 percent decrease, just as Tara’s would, regardless of the fact that Jim has owned his fund for more than 40 years and Tara has had hers for just one month. The age of the accounts is completely irrelevant. If anything, I’d argue that the long-timer Jim would have a tougher time sleeping at night because (all things being equal) he’d be likely to lose a lot more in absolute dollar terms than Tara.

Have you noticed that, for the most part, those who use this “wait for the long term” approach, which in my opinion is only good for calming investors’ frayed nerves, never specifically define exactly what they mean by the long term? Wouldn’t you like to know when you’ve hit “the long term,” so that you can rest assured you’ll never have to worry about losing any money in the stock market again? Well, I’m sorry, but there’s no such time – EVER!

Here’s my piece of advice to retirement investors: From my point of view, the long term is nothing more than an aggregate of short-term periods. So, if your nest egg keeps taking dips here and there during the “short-term,” guess what may well end up happening when your long term finally rolls around?
Contact Laser Financial Group today to set up your no-cost, no-obligation consultation. We'll examine your overall retirement and investment strategies – right now, for the short term, and as they will affect your heirs in the future. or 301.949.4449.

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