The main purpose most consumers invest in the capital markets is to have their retirement accounts appreciate so they can have something to live off of during their “golden years.”
For many, this entails readdressing the risk they are taking as they get close to retirement. But this is where a disconnect comes in. They spend too much time worrying about how their accounts perform relative to an arbitrary benchmark and lose focus of their actual goal. Many investors acknowledge that benchmarks don’t retire ... but we do, and with that must closely monitor the risk we are taking!
In 2008 the S&P 500 had a total return of minus 37 percent. For those with the mantra of just putting their assets into an index mutual fund and letting it ride, 2008 was a big wake up call. In order to make up a 37 percent loss, one would require an approximately 50.5 percent gain just to get back to even. Risk is the name of the game, especially in the tumultuous times as we are currently in.
John Paulson took a risk and it paid off with his 500+ percent gain, but risk popped up its little head again in 2011, cutting many of his partner’s investments in half. Managing risk, attempting to earn steady gains while preventing Paulson-like negative returns is one of the steps to having a happy retirement, not worrying about an inert benchmark that doesn’t have plans to travel and visit grandkids like many of you may have.
Joseph “Big Joe” Clark, whose column is published Saturdays, is a certified financial planner. He can be reached at email@example.com or 640-1524.