One of the fundamentals of successful long-term investing is monitoring the progress of your portfolio regularly to make sure it stays on track. Sometimes, however, focusing too closely on the wrong things can prompt overreactions, regardless of current market conditions
This type of short-term view can lead to decisions that actually impede your progress towards your long-term goals. How can you prevent your emotions from influencing your investment decisions? The key is to keep perspective and focus on the long term. When you have a well-structured plan in place, you can confidently remain committed to it, knowing that day-to-day market news is likely to have little impact on your longer term objectives or on the investment strategy that’s designed to get you there.
Playing it too safe can actually be risky
Where your retirement portfolio is concerned, it’s essential to have not only cash and fixed-income securities, which provide stable returns, but also equities. A diversified portfolio can provide the security and stability you require, while maintaining the growth you need to achieve your long-term goals. And it is time that makes all the difference. Yes, equity markets go down, but they mostly go up over time. During periods of market fluctuations, many people are hesitant to invest in the equity markets, preferring to wait for “better times.” The problem with this approach is that better times usually become visible only after markets have already risen. Investors who have been sitting on the sidelines have missed a valuable opportunity to participate. In other words, there can be a risk to playing it too safe.
A far more effective approach than trying to time the market is to establish a proper asset allocation that will put you in the best position to achieve your long-term goals. This will help you to establish discipline, take advantage of investment opportunities as they arise and keep your plan on track – no matter what the markets are doing.
The impact of inflation
At an annual inflation rate of just 3%, an item that costs $100 today would cost more than $155 in 15 years. At an inflation rate of 5%, the price would more than double – to $208 – over 15 years. Including the appropriate amount of equities within your portfolio can help you stay ahead of inflation over time. Historically, equities have outpaced inflation better than either fixed-income or cash holdings on a long-term basis. When investing for your retirement, it’s essential to have the secure, stable returns that cash and fixed-income securities provide. But allocating too much to conservative investments may allow inflation to catch up with you over time and put your long-term goals at risk.
On the other hand, putting too much of your portfolio into equities may lead to greater fluctuations than you might be comfortable with. The key to an effective plan is to find the balance that’s right for you.
This article is supplied by Angelo D’Amico, a Vice President, Portfolio Manager with RBC Dominion Securities Inc. Member CIPF. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. Angelo D’Amico can be reached at 514-878-5196.
