Sage Advice: Stay Invested

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“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.” Mark Cuban

The late Jack Bogle was fond of saying, “Nobody knows nothing.”  Which demonstrates that predicting the future is always hard, but 2020 illustrated to us just how difficult it can be. If you would’ve predicted that U.S. domestic stocks would rise over 10% in the same year as a global pandemic, no one would have believed you.  But that’s what makes markets so complex and volatile, especially in 2020, a year unlike any other.

The real problem is that there are too many economic and financial market unknowns to consider in the coming years and decade. And, he says, we, as a nation, are not focusing on what he believes to be the single most important concern in the economy: the “soaring cost of health care”. There is also the soon to be problem of pandemic caused ballooning federal deficits and national debt as a percentage of GDP.

Elected officials seem content to continue to kick the health care cost can down the road. But, with all of the potential economic uncertainty and financial market volatility, it’s hard to know what to do when it comes to investing.

The U.S. stock market is the greatest wealth-creation tool in history.

Investing in the stock market allows you to become a partial owner of thousands of profitable and growing companies. And, when paired with the power of compounding, the market is what allows you to save for retirement.

Below are five pieces of advice for investors who are worried about the turbulent economy and volatile financial markets:

  1. Keep investing. Keep putting money away. Despite fluctuations in the market, Investors should continue to save. And if the market dips? That’s okay since a lower market can be beneficial for funding longer-term goals such as retirement and education. Saving is always a good idea, and if you can add to savings when the market is low, you may be in a better position when the market goes back up.
  2. Pay attention to asset allocation. A good starting point for asset allocation, according to most financial advisors is a portfolio consisting of 65% stocks and 35% bonds. That’s it. “Stay out of the exotic stuff,” he says, however, noting that the allocations of assets may change depending on age and circumstances. If you’re younger, for example, you might skew towards investing more in stocks: you have time to take more risks. However, if you’re older, you might consider putting more in bonds, typically more conservative and consistent. But don’t tilt too far in either direction, he warns, noting that you should pay attention to the norms.
  3. Diversification is the key to any successful portfolio, and for good reason–a well-diversified portfolio can help an investor weather through the most turbulent markets. Diversification is the practice of spreading money among different investments to reduce risk. Historically, stocks, bonds, and cash have not moved up and down at the same time. The rationale is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. Diversification is a strategy that can be neatly summed up as “Don’t put all your eggs in one basket.”
  4. Expect lower returns. For years, the market was flush and paying out significant returns. That’s not going to continue. You should expect to see lower stock returns for the next 10-20 years, noting that 12% returns moving forward isn’t realistic. The same is true when it comes to bonds, he says, claiming that 6% returns are not in the cards. Managing those expectations is key.
  5. Don’t pay attention to fluctuating markets and keep putting money away so long as you are able. Remember that the markets – and your own investment strategy – may change over time. That shouldn’t make you so nervous that you bail. “Stay the course.”

If 2020 taught investors anything, it was, “Nobody knows nothing.”

It’s important to focus on saving and investing. You need to live below your means and invest the difference to accumulate wealth. There’s no backdoor trick around that fact.

References:

  1. https://investornews.vanguard/getting-started-with-investing/
  2. https://www.forbes.com/sites/kellyphillipserb/2016/06/15/vanguard-founder-jack-bogle-talks-about-taxes-investing-and-the-election/
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