Right now, there’s a lot of talk about market volatility and its effect on investments. “Should I sell?” and “How can I avoid risk?” are questions we hear time and again.
Yet, the most important question is, “what’s my biggest risk?” In which case, my answer is inflation. Inflation will hurt your financial wellness and thwart your retirement plans more certainly than market volatility ever could.
Inflation is a sure thing.
Markets rise and fall. But, we prepare you for this with a balanced portfolio that can ride the ups and downs.
We make sure you have equities, which outperform over the long term, as well as fixed income and cash, for more consistent returns in the short term. As a result, your portfolio will have lower volatility than an all-equity portfolio. In addition, we make sure to diversify within asset classes – holding global as well as Canadian equities, for example.
Markets fluctuate always. What doesn’t fluctuate is inflation.
Inflation gets worse every year. Currently it runs at about 2.5%. So, to maintain the same purchasing power over time, you need to make at least that much on your investments.
You won’t get that with guaranteed investments.
The high cost of guaranteed investments.
They currently yield no more than 1 to 2% at best. With guaranteed investments, the only thing you can be certain of is steady financial decline.
Is that a cost you’re willing to pay?
In fact, you need a healthy dose of stock market volatility in your portfolio. It’s the only way to achieve the returns required to offset the devastating effects of inflation and hope to meet your retirement income objectives.
According to Justin Wolfers, senior fellow at the Peterson Institute for International Economics and professor of economics and public policy at the University of Michigan, stocks have risen throughout every decade since 1900.
In that time, there’ve only been only two exceptions: during the Great Depression and at the very beginning of this century.
Yet, even though we look back on those two times with terror, in reality the losses were fairly small. We also fully recovered by the next decade.
I truly believe those two exceptions caused greater damage to our psyches than to our income – which brings me to the subject of my next blog: How to achieve inner peace in a volatile market.