I am always amazed at how much time and effort is spent discussing the markets. Talking about the markets is a lot like talking about the weather. No amount of talking or analysis will change what happened or shape where things are going. Yes, the markets (and the weather for that matter) can have a significant impact your your plan's success but focusing on a variable that is out of your control is not where you should invest your time.
Cursing the wind and yelling at the ocean is useless.
Yelling at the ocean.
The markets are important, and understanding how they move is a key component of creating a successful investment plan. However, you should be less concerned with the day to day swings of the markets than you are with the following controllable variables of your plan:
- Your Savings Rate - How much money are you putting away each pay period? Can you increase it by 1%? Whether the markets swing your portfolio up or down by 10% this year will likely have much less of an impact than a slight increase in your savings rate might. The up and down years will average out over time, that's the way markets work, but an increase in savings compounds over time and can make a huge difference to your goals. Saving an extra $1,000 per year at an average annual return of 8% will add up to $49,085 over a 20 year time period.
- Retirement Age - When do you plan to retire? What if you adjusted your planned retirement age by 1 year? How might that affect your plan? Assuming you are socking away $10,000 per year in your 401(k) and your retire in 21 years instead of 20, you would have an additional $51,115.
- Risk Exposure - If you find yourself losing sleep over the ups and downs of the stock market then it is highly likely that your portfolio is too risky. For you. The Vanguard Intermediate Treasury fund (VFITX) has had an average annual rate of return of 7.01% since its inception in 1991. In its worst year (1999) it was down a mere 3.52%. What would moving from a plan with an target rate of return of 8% (and the risk that comes with it) mean to your portfolio over 20 years? If we apply our $10,000 savings per year for 20 years example we would expect to have $56,745 less for retirement spending. However, risk being what it is, that 8% portfolio might have a lot less certainty due to its higher exposure to stocks. The Vanguard Total Stock Market Index fund (VTSMX) for example has an average rate of return of 7.40% since inception in 1992. But that extra 0.38% (compared to VFITX) of annual return came with some significant volatility as the fund had five down years with the worst being negative 37.04% in 2008.
- Planned Spending - Money lasts longer when you spend it slower. Reducing planned annual retirement spending by 3% can add years to your nest egg. While it is often difficult to estimate your cost of living 20 years out, having an understanding of how your planned spending will impact the success of your plan is a smart idea.
We all get caught up in the daily news from time to time and it is natural to feel powerless as the waves seem to whipsaw us about. But you have a lot more control than you think. Once you start exercising that control you will find the daily market updates much less interesting.
