Keeping
a Long-Term Perspective
According
to a recent survey, many older workers have decided to delay retirement until
they reach their 70s — or even 80s — largely because of retirement plan
losses.1
In the past year,
one-fourth of workers aged 45 and older have changed the age at which they plan
to retire. And most of them did so for economic reasons.2
As stock prices
improve, the natural temptation is to "make up for lost time" and
consider adding a few more stock-related investments to your portfolio. A year
or two of big returns, you might think, could put your portfolio back on track.
But reacting to
market moves — rather than relying on a long-term, diversified strategy —
can expose your portfolio to unnecessary risks.3;
Understanding
Diversification
A hypothetical "all-stock" portfolio mirroring the S&P 500
would have posted a 13.8 percent average annual return during the 25-year period
ending December 31, 2003. During that time, stock prices posted negative returns
in five different years. In its worst year (2002), this portfolio would have
lost almost one-fourth of its value, down 22.1 percent.4
During the same
period, an investment portfolio divided evenly among stocks, bonds, and cash
equivalents would have posted an 11.1 percent average annual return. This
balanced portfolio would have lost money only during four years; in its worst
year (2002), it would have lost 11.7 percent.5
When markets rebound, it's tempting to try to recoup losses. But keeping a
long-term perspective and sticking to your long-term investment strategy can
help you weather the ups and downs of the market.
1) The
Wall Street Journal, September 23, 2003
2) 2003 Retirement Confidence Survey, Employee Benefit Research Institute
3) Diversification does not guarantee against loss. It is a method used to help
manage investment risk.
4–5) Wiesenberger, 2004. Performance described is for the period 12/31/1978 to
12/31/2003. The all-stock portfolio is represented by the S&P 500 Composite
Index (total return), which is generally considered representative of U.S.
stocks. The balanced portfolio is divided evenly between stocks, bonds, and
cash. Stocks are represented by the S&P 500. Bonds are represented by the
Salomon Brothers Corporate Bond Composite Index, which is generally considered
representative of corporate bonds. Cash is represented by the annualized yield
on three-month Treasury bills, which are backed by the full faith and credit of
the U.S. government as to the timely payment of principal and interest. The
performance of an unmanaged index is not indicative of the performance of any
particular investment. Individuals cannot invest directly in an index. Past
performance is no guarantee of future results. The return and principal value of
stocks fluctuate with changes in market conditions. Shares, when sold, may be
worth more or less than their original cost.
