“Now is always the hardest time to invest.”
When it comes to investing, there is an old saying that goes “Now is always the hardest time to invest.” If you have been around a Compass advisor or been to one of our economic outlook events, you have probably heard one of us say that. Isn’t that true? It seems like there are always reasons not to take on investment risk. Maybe the markets are going down (seem familiar?) and you don’t want to lose money, or they are at all-time highs and you don’t want to get in at the wrong time. Maybe you have other, more pressing, things to do with your extra cash flow like pay off debt, do a kitchen remodel or pay for your kid’s college. None of these are bad things necessarily, but there is opportunity cost to NOT investing for your future goals. The longer you wait to invest, the MORE you may need to invest to meet your long term goals, like retirement.
I like to think about dividing your risk into different risk budget buckets.
For short term goals (like a major planned or unplanned expense in the next 12 months) you want to take as little risk as possible. Stick that money in a high yield savings account or short term interest rate vehicle (like a CD or treasury bond). Your “emergency fund” assets would fall under this bucket as well. Keep in mind that some of those guaranteed interest vehicles have liquidity restrictions and you may need to wait for them to mature before you can get your interest credit.
For intermediate term goals (2-4 years out) you can maybe get some better longer term CD rates or higher yielding investment grade bond yields. You may want to take on a little more market risk by utilizing some bonds strategies or low volatility/market neutral investments. These can still lose value but usually to a lesser degree than the overall stock market. As you get closer to needing the money, consider moving the money in this bucket to the short term bucket.
For long term goals it gets a bit more complicated. There are two things to consider. How much risk are you WILLING to take, and how much risk do you NEED to take? How much risk you are willing to take is based on your risk tolerance. We have multiple ways to determine what we think your risk tolerance is, but until you actually experience it, it is hard to know how you actually feel about it. The other question on how much risk you NEED to take relates more to what your financial plan dictates. If we use a 5% rate of return in your financial plan and that is enough, you may not need to take on a lot of risk to try and attain a 10% return.
At the end of the day, we need to determine what you need your money to do for you as it relates to short, intermediate, and long term goals. Once we know that, we can put together a game plan for these different pieces. When you look at it that way, it might be better to say “now is always the BEST time to invest.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed
country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.