I want to share three truths about risk in investments. How you apply them is your call, I’m just sharing.
The first thing we need to accept is that both good days and bad days in the market are highly impactful on our portfolios. Often we only worry about the best days. This is dangerous. If you had $1 invested in the S&P from 1928 to 2010, it would have a cumulative return of $73.21. If you would have missed the 10 worst days over that time period, your cumulative value would have been $228.71. That’s quite a difference!
The second thing we need to accept as truth is that average return is not equal to actual return. Those down swings have an impact on our portfolios that aren’t often talked about. Think about it. If you have $100 and you loose 50% in year one, but gain 50% in year two, your average return is 0%. You broke even, right? Wrong! You have an actual return of -25% and you have only $75 dollars. Funny they don’t clarify that more often. Protection from those losses will do a lot more for your portfolio than an extra percent or two of returns will in the good years.
Third, and a truth that we all know but sometimes forget, is the truth of inflation.
Inflation marches on and will always be a part of our lives. Putting our retirement nest eggs in almost zero paying bank accounts will actually cause losses to our purchasing power over time. We can’t afford to sit on our money or put under a mattress or we are guaranteed losses.
There are safe money alternatives that follow these truths, protect from downside risk and provide great returns along the way. They continue to improve and more and more people are enjoying the idea that “the truth shall set you free” in retirement.