Key points
- Staying invested for long-term growth can help you keep up with inflation.
- Attempts to time the market are almost never successful.
- Adjust your retirement income strategy to withstand changes in the markets.
- Don't sell investments that have dropped in value if you do not immediately need the money.
Invest for the long term
In retirement
Staying the course with a plan for long-term investment can pay off over time. While it may be tempting to place your savings into low-return conservative investments, you should also consider the risk that you may outlive your assets or that your assets will not keep pace with inflation.
Countering the effects of inflation with a plan for long-term investment
Even at a moderate 3% rate, inflation can cut the purchasing power of your retirement savings almost in half over 20 years. If you're entirely invested in cash and short-term investments, these assets are likely to shrink in "real" value during a long retirement.
By comparison, stocks have historically outpaced inflation and provided strong returns over the long term. If you are concerned about losses in the stock market, there may be ways to adjust your asset allocation so that your overall portfolio is somewhat less volatile — without giving up all of its growth potential.
Enjoying a longer life
People are living longer these days, meaning your retirement savings may have to last a long time as well. How long? According to the Society of Actuaries1:
- A 60-year-old man has a 50% chance of living to age 84 or older.
- A 60-year-old woman has a 50% chance of living to 87 or older.
- At least one member of a 60-year-old couple has a 50% chance of living to be 91 or older.
Longevity trends suggest that these remarkable numbers will continue to rise.
Your total investment time horizon is longer than you may have thought. Depending on your age today, you could be creating and managing an investment strategy for 20 years or more.
Market timing can be costly
From a historical perspective, it's clear that the stock market has made many of its long-term gains in sudden spurts. For example, the S&P 500® Composite Stock Price Index of large-company U.S. stocks posted an average annual return of 10.33% over 20 years from 1988 through 2008. But if you were out of the market during the Index's best 20 days during this period, your return would actually have only been 5.73%. So trying to time the market, even briefly, can cost you dearly.
Buy-and-hold return for the S&P 500
Markets tend to recover
History is on the side of investors with a long-term investment approach. Volatile markets are a fact of life — as are market recoveries. Between World War II and 2008, there were 10 recessions, with an average market decline of 22.6%.
But you may be surprised by the size of the subsequent recoveries: 12 months following each market low point, prices were up an impressive average of 32%. What does this tell us? Be patient and stay invested. Markets tend to bounce back from downturns, typically with a healthy revival.
An Ameriprise financial advisor can help you define and create a strategy to give you the best chance for long-term success.
1 Source: Society of Actuaries' Annuity 2000 Mortality tables. Copyright 2009 by the Society of Actuaries, Schaumburg, Illinois. Posted with permission.
Past performance is not a guarantee of future results.
Neither asset allocation nor diversification can assure a profit or protect against loss.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA and SIPC.
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