Plan Your Prosperity by Kenneth L. Fisher & Lara Hoffmans

Author:Kenneth L. Fisher & Lara Hoffmans
Language: eng
Format: mobi, epub
Publisher: John Wiley & Sons, Ltd.
Published: 2012-09-22T05:00:00+00:00

Expecting Volatility

If you have a longer time horizon and growth goals, then you need some amount of equities in your benchmark. The more growth you need and the longer your time horizon, the more a bigger allocation of equities likely becomes appropriate. Unfortunately, there’s no easy-to-follow prescriptive formula. Again, such things ignore the myriad factors unique to you. But as a general guide (and setting aside, for now, the impact of cash flows), the more equities you have in your benchmark, the higher your long-term growth prospects.

And the more equities you have, the more you’ll be exposed to shorter-term downside volatility. But—I said this in Chapter 4, and I’ll say it again—volatility is normal.

(One more time.) Volatility is normal, to be expected and not a signal of long-term trouble. If you need growth, you need some degree of equities, and you will be exposed to volatility—both up and down. This is true of all asset classes. All asset classes experience price volatility. As you create your retirement investing plan, that must be part of what you expect, or you could be setting yourself up for mistakes—maybe hugely costly ones.

Why? Folks often run into trouble, not because their portfolios are suffering market-like downside (if they have a long time horizon). No—they often run into trouble because they suffer market-like downside, then panic and decide to bail on stocks or make some other major change. (In effect, buying high and selling low.) Material changes to your benchmark should be driven by (you know this cold now) time horizon, return expectations, cash flow needs or some other major factor. They shouldn’t be driven solely by the discomfort caused by near-term volatility.

Making such material changes—driven by fear, not something fundamental that’s changed—is often what causes folks to badly lag the market on average (as discussed in Chapter 2). For many investors, it’s not the volatility that hurts them long term, but their reaction to it.

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