Written by: Tradex Management Inc.
Investing is a long-term journey, often filled with volatility, uncertainties, and the need for careful planning. Whether you’re a seasoned investor or just starting, understanding the nuances of investing, such as sequence of returns risk, the value of financial advisors, and the pitfalls of market timing, can significantly impact your financial future.
Sequence-of-returns risk refers to the potential negative impact on an investor’s portfolio due to the order in which investment returns occur, particularly during the withdrawal phase of retirement. Even if the average return over time is favorable, experiencing poor returns early in retirement can deplete your portfolio more rapidly, leaving less capital to benefit from potential future gains. This risk is especially significant for retirees who rely on regular withdrawals for living expenses, as early losses can reduce the longevity of their investments. To mitigate this risk, Tradex recommends using strategies such as diversifying your investment portfolio, maintaining a cash reserve in a high-yielding money market fund or account, purchasing laddered GICs, or employing a dynamic withdrawal strategy that adjusts based on market conditions. This ensures that you will not have to sell your equity investments while dire during a bear market, further protecting your portfolio from sequence of returns risk.
Market volatility is an inevitable part of investing, and how investors react to it can make or break their financial success. One of the most common mistakes is attempting to time the market—buying low and selling high. While this sounds appealing in theory, in practice, it is incredibly challenging and often counterproductive. If an investor missed just the 10 best days in the stock market over a 20-year period, their annual returns would be reduced by nearly 50%. The average annual return for someone fully invested in the S&P 500 from 2001 to 2020 was 7.5%. However, missing the 10 best days during that period would drop the return to just 3.4%. Furthermore, the best days in the market often occur shortly after the worst days, making it nearly impossible to time the market accurately. Attempting to do so not only risks missing out on significant gains but also adds stress and emotional turmoil to the investment process. Another research on rolling periods risk and returns, conducted by Morningstar, emphasizes the importance of long-term investing instead of short-term trading. It shows that while short-term periods (1-year or 3-year) can produce a wide range of outcomes both positive and negative, investing over longer periods (10 or 20 years) increases the likelihood of achieving positive compounding annual returns.
Speaking of short-term vs long-term investing, many investors are drawn to the idea of managing their portfolios independently, often to save on fees and due to the excitement of stock picking. However, the role of a financial advisor extends far beyond picking the right stocks, ETFs, mutual funds, and other investment products. A financial advisor can provide comprehensive financial planning, including retirement planning, tax strategies, estate planning, and risk management, all of which contribute to long-term financial success. Numerous studies support the value of professional financial advice. A study conducted by Vanguard (one of the most popular fund companies used by retail and do it yourself (DIY) investors) concluded that financial advisors can add about 3% in net returns annually to a client’s portfolio. This added value comes from a variety of factors, including behavioral discipline, rebalancing portfolios, tax-efficiency, and efficient withdrawal strategies. The same study found that investors who work with advisors tend to stay the course during market volatility, avoiding the pitfalls of panic selling. In contrast, DIY investors are more prone to emotion driven decision-making, which often leads to buying high and selling low. Another study conducted by ClearBridge Investments echoes that the average retail investor over a 20-year period saw a return of 3.6%. To put into perspective, over a 20-year period, US stocks returned approximately 9.5% per year, almost tripling the average return of a DIY investor. This type of underperformance can significantly impact the growth of a portfolio over time, especially when compounded over decades. Investing successfully requires understanding and managing several key risks, including sequence-of-returns risk, and recognizing the value of professional advice. While the allure of DIY investing is strong, the data suggests that working with a financial advisor can add substantial compounding value, particularly during periods of market volatility.
In an ever-changing financial landscape, the guidance of a seasoned Tradex advisor, combined with a disciplined and personalized investment approach, can help navigate the complexities of the market, ensuring that your financial goals are met while minimizing the risks along the way. Sign up and join Tradex and Applaud on the upcoming Pre-Retirement Course on October 10th (Ottawa) and November 13th (Toronto). With the courses, Tradex offers individualized retirement income projections and portfolio reviews at no cost.
Summary:
Investing is a long-term journey, often filled with volatility, uncertainties, and the need for careful planning. Whether you’re a seasoned investor or just starting, understanding the nuances of investing, such as sequence of returns risk, the value of financial advisors, and the pitfalls of market timing, can significantly impact your financial future.
Sequence-of-returns risk refers to the potential negative impact on an investor’s portfolio due to the order in which investment returns occur, particularly during the withdrawal phase of retirement. Even if the average return over time is favorable, experiencing poor returns early in retirement can deplete your portfolio more rapidly, leaving less capital to benefit from potential future gains. This risk is especially significant for retirees who rely on regular withdrawals for living expenses, as early losses can reduce the longevity of their investments. To mitigate this risk, Tradex recommends using strategies such as diversifying your investment portfolio, maintaining a cash reserve in a high-yielding money market fund or account, purchasing laddered GICs, or employing a dynamic withdrawal strategy that adjusts based on market conditions. This ensures that you will not have to sell your equity investments while dire during a bear market, further protecting your portfolio from sequence of returns risk.
Market volatility is an inevitable part of investing, and how investors react to it can make or break their financial success. One of the most common mistakes is attempting to time the market—buying low and selling high. While this sounds appealing in theory, in practice, it is incredibly challenging and often counterproductive. If an investor missed just the 10 best days in the stock market over a 20-year period, their annual returns would be reduced by nearly 50%. The average annual return for someone fully invested in the S&P 500 from 2001 to 2020 was 7.5%. However, missing the 10 best days during that period would drop the return to just 3.4%. Furthermore, the best days in the market often occur shortly after the worst days, making it nearly impossible to time the market accurately. Attempting to do so not only risks missing out on significant gains but also adds stress and emotional turmoil to the investment process. Another research on rolling periods risk and returns, conducted by Morningstar, emphasizes the importance of long-term investing instead of short-term trading. It shows that while short-term periods (1-year or 3-year) can produce a wide range of outcomes both positive and negative, investing over longer periods (10 or 20 years) increases the likelihood of achieving positive compounding annual returns.
Speaking of short-term vs long-term investing, many investors are drawn to the idea of managing their portfolios independently, often to save on fees and due to the excitement of stock picking. However, the role of a financial advisor extends far beyond picking the right stocks, ETFs, mutual funds, and other investment products. A financial advisor can provide comprehensive financial planning, including retirement planning, tax strategies, estate planning, and risk management, all of which contribute to long-term financial success. Numerous studies support the value of professional financial advice. A study conducted by Vanguard (one of the most popular fund companies used by retail and do it yourself (DIY) investors) concluded that financial advisors can add about 3% in net returns annually to a client’s portfolio. This added value comes from a variety of factors, including behavioral discipline, rebalancing portfolios, tax-efficiency, and efficient withdrawal strategies. The same study found that investors who work with advisors tend to stay the course during market volatility, avoiding the pitfalls of panic selling. In contrast, DIY investors are more prone to emotion driven decision-making, which often leads to buying high and selling low. Another study conducted by ClearBridge Investments echoes that the average retail investor over a 20-year period saw a return of 3.6%. To put into perspective, over a 20-year period, US stocks returned approximately 9.5% per year, almost tripling the average return of a DIY investor. This type of underperformance can significantly impact the growth of a portfolio over time, especially when compounded over decades. Investing successfully requires understanding and managing several key risks, including sequence-of-returns risk, and recognizing the value of professional advice. While the allure of DIY investing is strong, the data suggests that working with a financial advisor can add substantial compounding value, particularly during periods of market volatility.
In an ever-changing financial landscape, the guidance of a seasoned Tradex advisor, combined with a disciplined and personalized investment approach, can help navigate the complexities of the market, ensuring that your financial goals are met while minimizing the risks along the way. Sign up and join Tradex and Applaud on the upcoming Pre-Retirement Course on October 10th (Ottawa) and November 13th (Toronto). With the courses, Tradex offers individualized retirement income projections and portfolio reviews at no cost.
Summary:
- Sequence-of-returns risk can erode retirement savings, but strategies like diversification and dynamic withdrawals help mitigate this.
- Financial advisors offer value beyond stock picking, adding around 3% annually through disciplined strategies and long-term planning.
- Do it yourself (DIY) investors often underperform due to emotional decision-making and poor market timing, with the average retail investor earning only 3.6% annual compound return over 20 years.
- Market timing is risky and missing just the 10 best days in a 20-year period can significantly reduce returns.
- Volatility reduces over long-term periods, and professional guidance can enhance success in reaching financial goals.