There are many ways investors interpret the idea of long term. This is particularly relevant when the investor is about to retire and thinks, “I don’t have long term.” Some will define long-term investing with a number, while others define long-term investing as their lifetime. If you ask the IRS what “long term” is, they will define it as one year. The late British economist, John Maynard Keynes, famously said, “In the long term, we are all dead.” What’s the right answer?
The answer is incredibly unsatisfactory for those looking to attach a number to long term. Long term is simply how long it takes to achieve your financial goals. Financial goals take shape in the form of statements such as: I want to maintain my current lifestyle in retirement, or, I would like to leave a large inheritance. Financial goals could exceed a lifetime and possibly even the next, and we call these intergenerational goals.
Some investors who enter retirement feel as if long term is not far at all or seems very far away. This thinking can lead investors into taking too little or too much risk. Let’s consider an example where an investor, Bob, feels he does not have enough assets to take risk with and ends up owning 100% bonds with a plan to use it through retirement. Bob is worried that taking any risk with the money he saved will jeopardize his future. The greatest irony here is that by taking no risk Bob put himself at greater risk of not achieving his goal. What’s working against him?
Bob faces many uncertainties that could disrupt his plan. There could be medical emergencies, higher inflation particularly as it relates to health care costs, and other unforeseen events that could require Bob to draw down on the account more heavily than expected. The plan could also be disrupted by his living longer than expected. These are very real risks and a 100% bond portfolio may not be able to hedge against these risks due to its lower expected return. Long term for Bob could be much longer than anticipated.
On the flip side, it could be the case that taking extra risk is not necessary. Consider another example where an investor, Sally, is just entering retirement and wants to have 100% stocks. Sally has done a good job saving for retirement and has a successful financial plan, but she feels, like Bob, that her assets are not enough. Through our planning process, we end up discovering that she doesn’t need to have 100% stocks to achieve her goals. For Sally, she felt as if she would outlive her money and that long term is too far away.
Nonetheless, Bob and Sally both still face uncertain futures regarding how long they will live and whatever other life events happen, but in their long-term investing they should do the best they can with what they can control. A good example of what investors cannot control is poor market conditions. Investors can, however, control how they respond to market conditions. Our financial plans take into account poor market conditions. The long-term consequences of selling in down markets can easily turn a successful plan into a failing one. Further, short-term timing of the market is extremely difficult because you need to be correct twice – selling at the peak and buying back at the bottom.
At RegentAtlantic, our financial planning process is designed to take your entire financial condition and goals into account when making a plan. We can update your plan when major life events occur, when you’re curious how large purchases would affect the success of your plan, or when you need to take more money on a monthly basis. Our planning takes into account many variables such as inflation rates, life expectancy tables, and randomized portfolio returns to stress test a financial plan. Whether retirement is around the corner or a distant future, a financial plan and an investment portfolio should be oriented for the long term to help you achieve your financial goals.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.