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There are a lot of cliches in retirement planning. And a lot of them are cliches for a good reason – they’re good advice. But not always, and more than a few of them are right for the wrong reasons.
One of those cliches is that with investing you need to focus on the long term to reduce the risks from investing. It is absolutely true that investing is a long-term activity, but is that second part true? Do stocks (and other types of investments) get safer the longer you hold onto them?
For many, the default approach seems to be to just “save what I can” for retirement. Individuals taking this approach usually save what’s “leftover” after making payments on their home, car and credit cards and covering their expenses of daily living. People generally recognize that they should save at least enough to capture their employer’s 401(k) match, if such a match exists, lest they “leave money on the table” each year.
Inflation is a fact of life. It’s also not so great for retirees. In fact, it’s one of the biggest risks that retirees face. By constantly eating away at the value of our savings and income, inflation will slowly reduce our purchasing power in retirement – if we don’t do anything about it.
The appeal of market timing is obvious. Who wouldn’t want to get in and out of the market at the best time every time? We’ve talked a lot about market timing in the past – timing risk premiums, trying to time the markets on a daily basis, and the importance of staying disciplined even when it seems obvious the markets are going to go down.
The numbers show that active management simply doesn’t work. There are several arguments against active fund managers, but one of the most damning is that winners don’t seem to repeat.
Every four years we talk about how this year’s Presidential election is the most important
All too often, the funds you use end up sabotaging your asset allocation. What if the funds you select don’t do what you think they will? When you use actively managed funds, you have to watch out for something called “style drift” – when a fund’s style (what the fund actually owns) moves over time.
The market is going to drag your portfolio through every mud puddle it finds. It’s your job to pick your portfolio up, dust it off, and point it back in the right direction. Rebalancing brings your portfolio back into line, and ensures that you are taking the right amount of risk through time.
The financial media loves to talk about interest rates. There are a lot of good