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Can you afford to be afraid in your investment strategy?

With recent market volatility it is only natural to feel nervous.  But can you afford to allow your emotion to influence your investment decisions?  


I have been thinking about how to convey investment reality in terms of risk.  The reality is very simple when viewed in the long run.  Unfortunately the tendency is to overemphasize the short term and that comes with major consequences for long term results.

Imagine this. I was born in 1945.  Suppose I was gifted $100.  Granted $100 was a big sum in those days. Today it would require $1,302.44 to equal the same purchasing power.

If my parents chose to be very conservative and take no risks they probably would have invested in safe and guaranteed investments yielding very little.  Using United States 6 month Treasury Bills as a benchmark the expected yield over 73 years would have been 3.95% annualized. 

If they were more aggressive, but still not wanting to take risk, they probably would have invested in bonds.  The bond yield would have been about 5.22% annualized. 

And if they were investors who really understood the time value of money they would have bought stocks.  The average annual return was 10.79% over the 73 year period.

All the returns seem good enough when viewed in the present.  But after compound interest works its magic, the reality is very few people have enough money to avoid risk. Avoiding risk has significant costs when long term consequences are considered.

But 73 years later the reality is very apparent. My parents should have invested in stocks for my benefit.

The safe Treasury bill investment is worth only $1,691.  The original $100 adjusted for inflation is $1402.

The bond investment is worth $4003.

BUT the equity investment grew to $177,231!

For the skeptical, let’s suppose you were fully invested when the market peaked in 2008.  You did not sell.  You stayed the course while your friends boasted about how they got out of the stock market.

If you ignored all the negative news and remained fully invested, your return over the past 9 years has been about 8.7%. Granted it is not 10% but who would deny 8.7% beat returns in safe investments.

Yes there will always be periods when cash and bonds beat returns in stocks.  The reality is it has never happened over the long run. During this period of higher volatility we remain committed to buying stocks for the long run.  Fixed income holdings in balanced accounts continue to be invested in shorter term and higher quality securities.  Our primary objective in fixed income is to preserve principal with income being a secondary objective.  Of course fixed income will help us reduce portfolio volatility but the reality is it significantly reduces long term growth of principal.

Thomas J. Curran
Chief Executive Officer


Please check with your tax advisor, your Curran Wealth relationship manager, or contact Curran Wealth Management if you have any questions.  
518.391.4200
info@curranllc.com

The information herein is considered to be obtained from reference sources deemed reliable, but no representation or warranty is made as to its accuracy or completeness. No one connected with CIM, LLC or CIMAS, LLC can ensure tax consequences of any transaction.