Time Heals All Wounds

Even before we move into the last month of 2008, the financial year has already proved itself an “outlier”–a term from statistical analysis that specifies the unusual, the anomalous.  It has brought the kind of stock market lows that investors have been advised to avoid, or at least outlast, by using “long-term” stock investment strategies.  The idea behind long-term investing is that the investor relies on time, in addition to portfolio balancing, to smooth out the dips and peaks in returns on investment.  Okay, so how how much time does long-term balancing require?

Recent research by Wharton professor Jeremy Siegel, proposes that at least 20 years is the optimum “term” for investments.  Using 100 years’ worth of data, Siegel calculated that in any 20-year period, stock returns will better bonds’ conservative returns.  What does this mean for investors looking to retire?

Timing is everything.  And a number of mutual fund firms offer investors target-date portfolios that provide some assurance that once the investor retires, the cash will last as long as the investor.  The guiding force behind these target-date portfolios is Monte Carlo software, which uses historical data to apply risk analysis to project year-by-year returns for the investor.  These risk assessments do take into account outlier low years like 2008, but in these simulations the better returns in surrounding years offset the sinking spells.  

In other words, never mind the pain of the present, time heals all wounds.  But–worst case scenario–what if your target date coincides with an outlier low like our current nadir?  Hang in there for a while.  It may not take all 19 years.

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