Many Retirees Are Unaware Of This Major Market Risk; Are You?

It is normal to meet someone who feels all their assets, including their retirement savings, should be in equities. The logic is that, over time, stocks are one of the best venues for growth, which is correct. However, these assertions frequently refer to long-term averages, which, when investigated further, might be misleading.

This article is meant to answer a significant point. Averages are a valuable tool for retirement planning, but there is more to consider.

Averages may be deceiving

If you had a $100,000 account and anticipated it to increase by 10% on average, you would most likely expect the following to occur:

• Year 0: $100,000

• Year 1: $110,000 (10% increase)

• Year 2: $121,000 (10% increase)

However, markets are often inconsistent. For example, if you lost 30% and then gained 50%, you'd still have a 10% return year after year, but the outcome would be substantially different.

• Year 0: $100,000

• Year One: $70,000 (30% loss)

• Year 2: $105,000 (50% increase)

You might assume I'm manipulating the math to show a point by including the 30% loss in year one. Let's do it in reverse and see what happens.

• Year 0: $100,000

• Year 1: $150,000 (a 50% increase)

• Year 2: $105,000 (30 percent loss)

Volatility (ups and downs) is necessary. Using a simple average to forecast the growth of your accounts may be problematic.

Remember that there is no perfect investment or investment strategy. Having a plan and then constructing your portfolio to complement it is critical.