This was probably because of my age, but I had a hard time understanding why people are freaking out on market volatility days after days. As some people acknowledge, the stock market needs lithium in order to re-establish its highs and lows to a smoother level. Unfortunately, we didn’t find the right medicine yet to control the stock market.
Several researches have been made on market fluctuation and how diversification can help to restrain the highs and lows. I was attending to a retirement planning session the other day and I realized the importance of the amount and the frequency of withdrawal at retirement compared to market volatility.
In fact, market fluctuations should not bother you that much until you retire as you are not about to withdraw any capital from your investments. However, this is another story when you open up the faucet of your investment portfolio.
For example, if you plan on withdrawing 8% of your capital per year at your retirement and during your first year you show a negative return of -15%, in fact your portfolio will be down by 23%. This may jeopardize your whole retirement plan.
Most people would say that you can sell a good part of your stocks in order to buy more bonds or other fixed income products. Well if you are 60 and you have 60% to 70% of your portfolio invested in fixed income, you might survive your portfolio. In financial planning, we should plan for a life expectancy of 90 years. Do you really think that you can last 30 years with a 4-5% return? You better have a huge nest egg before retiring!
Fortunately, there is good news for everybody 😀 With the help of a financial advisor (preferably an accredited financial planner), you will be able to get as much as the stock market with less volatility.
In fact, with a good planning and an asset diversification of your portfolio, you can average a return of 8% to 9% without living the market roller coaster.
It is obvious that you will go through bad years with negative returns. However, you may only be affected by a drop of 5 to 10% instead of 15%, 20% or a 30% drop. The annualized rate over a long period of time will remain the same. However, the volatility will be reduced and you will be able to withdraw funds from your investments without having to calculate the impact of a bad year every time!
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