You don’t need me to tell you these are challenging times for investors. The market crash that started in 2008 cost many investors a good chunk of their portfolio. The rapid recovery did nothing for those who fled to safety, following the advice of many who predicted financial disaster.
Now we are confronted with unprecedented volatility in the Middle East, which has already increased the price of fuel at the pump. The specter of a reduction in the flow of oil has roiled the markets. Investors don’t like uncertainty and that seems to be all they have these days.
The financial media and the securities industry love uncertainty. Uncertainty makes investors nervous. They want to know what the future will hold and how it will affect their investments. Ratings and readership increase markedly in times of uncertainty. Financial pundits are eager to offer their opinions and to guide investors through these troubled times.
You would be better off looking elsewhere for helpful advice. Markets are unpredictable and no one can predict random events. Did your broker prepare you for the upheaval in Egypt and Libya? I don’t blame them for not doing so. I fault them for pretending they have insight about the future. They don’t. Don’t be distracted by current events or by those who believe they have predictive powers.
[Visit the U.S. News Retirement site for more planning ideas and advice.]
If you are investing for today’s returns, you’re gambling. You are likely to lose a significant portion of your money. Today’s news should be irrelevant. You should be focused on the returns your portfolio will generate over the long term. By long term, I mean a minimum of 20 years, for all but retired investors. A 60-year-old male has a life expectancy of 20 years and a female the same age can expect to live more than 23 years. You need a plan to insure you can maintain your quality of life until you or your surviving spouse or partner dies.
This planning involves maximizing your wealth during your working years and then structuring a portfolio that will insure you don’t run out of money during your lifetime. It has nothing to do with the current or future price of oil or whether the U.S. will slip into another recession. Now that you are reoriented towards what’s really important, you need to know the following:
- How much will I need to accumulate while I am working to insure inflation does not erode my standard of living in retirement?
- How much will I need to withdraw in retirement to meet my expenses, adjusted for taxes and inflation?
- How can I insure neither I nor my surviving spouse or partner won’t run out of money?
- How can I achieve these goals and take the minimum risk necessary to do so?
[See The Arrogance of Trading.]
Investors frequently ask my opinion about a given stock, the direction of the markets, or the impact of current events on their investments. They seem disappointed when I tell them I don’t know anything of value about any of these issues.
You need to know the answer to questions that will determine your financial future. If you don’t, find someone who does. That person won’t waste your time trying to predict the future.
Dan Solin is a senior vice president of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, will be released in September, 2011.