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Investment Returns are Cyclical and Unpredictable
In today’s market, a short term interest rate of 1% is highly coveted and difficult to find. The total return on the S & P Market index during the last ten years is in the low single digits. These returns are much lower than the historical averages of the last century. Where are the stock market returns of 9%? What happened during the first decade of the new millennium to change the market returns and interest rates?
- Mortgage Meltdown
- Sub Prime Lending Crisis
- European Debt Crisis
- Wars in the middle east
- Growth of China as a major world competitor
There are always outside forces that play on our economy and investment returns. These forces are called systematic or market risk. This risk is unavoidable and plagues all market participants. No matter how diverisifed your portfolio is, you cannot avoid systematic risk.
What is an investor to do?
In reviewing the stock market returns from 1928 to 2011 one could assume that rates went smoothly upward at 9.28% per year. Actually, that average hides a bumpy road. Returns on stocks over that time period ranged from annual double digit losses to annual double digit gains. Growth in investing is fraught with ups and downs. Not unlike life itself.
Is There a Pattern to Economic Growth and What Does it Mean for You?
Economic growth typically follows a path that looks a bit like a roller coaster, with gradual increases, leading to a high point of strong economic growth, followed by slowing GDP and usually a recession. This type of growth is certain, where the mystery comes in is the “when”. Cyclical growth is a given; but when the trend changes is unknown.
ECONOMIC GROWTH CYCLE
This pattern means several things to investors. Investing is a long term endeavor. Don’t even think about investing any money you will need within the next 5 years in the stock markets. Stock market returns are way too volatile for short term investing. Knowledge of market behavior will help you stay the course during market fluctuations. Once you understand that the ups and downs in economic and investment returns are normal occurrences, you can learn not to be surprised when the market tanks for a year or so. In fact expect that every few years, there will be a year with negative stock and/or bond returns.
Accept Ups and Downs in the Market as a Reality and Profit
As an investor here is a simple plan to stay the course.
1. Choose an asset allocation you can live with.
2. Select diversified low cost index funds from a range of asset classes for your investment portfolio.
3. Contribute regularly to your investment account during market ups and downs. In fact, contributing assets in a declining market yields the greatest rewards.
4. Look at how much money you can amass over a few decades of regular investing. Invest $4,000 per year from ages 25 to 65 in a diversified stock index fund with an average annual return of 7.5% and retire with close to $1,000,000.00. Regular investing over time yields great rewards.
5. You must download my free eBook; 20 MINUTE GUIDE TO INVESTING to learn investing basics and receive a bonus subscription to the Wealth Tips Newsletter.
Following are some of my recent investing articles across the blogosphere;
The Digerati Life, Buying Bond? The Effect of Interest Rates on Bond Value versus Yield
Free Money Finance. Dividend Investing is Not the Perfect Solution for Yield
Consumerism Commentary, I’m consulted about Buying a House with Cash
Women’s Money Week
I’m participating in Women’s Money Week next week. Women have historically been laggards when it comes to finances. This week is about encouraging women to speak up about money, take control of our finances, and reshape our financial future. Women’s Money Week will run from March 5th-11th, 2012 on WomensMoneyWeek.com — coinciding with International Women’s Day.
Following are a few of the participating blogs in Women’s Money Week (I’ll include a few more each day)
Monroe on a Budget
Moola Saving Mom
Mortgage Free By 30
Mrs. Nespy’s World
Ms. Money Savvy
Musing of an Abstract Aucklander
Musings of a Midlife Mom
My 1/2 Dozen Daily
My Broken Coin
My Dollar Plan
My Journey to Eliminate Debt
My Money and My Life
My Open Wallet
My Pretty Pennies
My Year Without Wasting Money
ND Chic’s Cents
Newlyweds on a Budget
Next Stage, The: Women and Retirement
No More Sheeple
No More Spending
Northern Living Allowance
Not a Coupon Queen
Not Made of Money