Saving early for retirement is a virtue, but only half the equation at best. An equally important component is to find the right investments to allow your money to grow. A seed sown in infertile soil will not yield anything much even if dedicated sunlight and water was given. Often times and out of fear of losing the retirement they envision, some people prefer to “avoid risk” by not being in the market at all or by investing on safer investments (e.g. Fixed Deposits); However, what they rarely understand is that all investing, as well as sitting on the sidelines, involves some levels of risk. Depending on current market conditions and your specific financial situation, those risks may be higher than you think.
Let’s pull apart 3 misconceptions that being on the sidelines is less risky and won’t cause you to lose the money you have worked hard to retire on.
There is No Risk when I’m out of the Market?
– There are 2 types of people in the world. (1) People who make money (2) People who watch other people make money.
There are Singaporean investors who prefer to sit out of the market entirely or try to time market entry/exit. The result: sub-par performance that will prevent you from building the long-term wealth that will sustain you in retirement. Retirement can easily last over 25 years, retirees need to not only preserve what they have saved but also look for ways to continuously grow their savings or else, they face the real risk of outliving their savings.
For example, if an investor, out of panic, offloaded his portfolio at the peak of panic during the Global Financial Crisis with the STI at 1594 level in Feb 2009, and quit ever getting back into the Stock Market for fear of it collapsing again – He would have missed out on one of the longest market recoveries in history, with STI levels at 3212, 10 years later in Feb 2019, a whopping 201% return.
I will Invest in Fixed Deposits (or equivalents) in order not to lose any Money.
– The first thing investors in FDs will be met with is Reinvestment risk – where he might potentially not be able to enjoy current interest rates at future renewals. An investor who was enjoying a 2.5%p.a. on his FD in 2019 would have had to settle for a 0.8%p.a. return at the point of writing this article. The second risk he would be exposed to will be inflation risk – the risk of your low returns not exceeding inflation, which will erode your future purchasing power. In other words, your standard of living and what you can afford could easily be less in the future, especially with longer life spans.
I will Wait until the Market is less Volatile before investing.
– The first thing to understand when investing is that market volatility is a normal component of investing. Like how there will always be cars passing along a busy road – It will be a fool’s errand to wait until the road is entirely empty before attempting to cross it. Instead, take the pedestrian crossing or the overhead bridge. Find a strategy to live with Volatility. Despite average intra-year drops of 14.1%, the S&P 500 Index has had positive annual returns in 28 of 37 years or 75% of the time from 1980 through September 30, 2017.
Risk is usually misunderstood and associated solely with volatility, many investors don’t realize that by avoiding what they deem are riskier investments, they are missing potential opportunities like buying quality assets at a discount.
It is very important to understand that risk is a necessary component of investment that can work to your advantage, if managed correctly. The best defense against taking too much or too little risk in your investing is to have both, a well thought Financial Plan that is in line with your risk tolerance and financial goals, and a well-diversified portfolio.
DISCLAIMER: The views expressed here are solely those of the author in his private capacity and not necessarily to the author’s employer, organization, committee or other group or individual.