Market Losses: Do You Have The Time?

The risk of investment losses comes about due to volatility in the price of our investments. Today, a financial instrument can be purchased for $X a share, acre, ounce or unit. Tomorrow, the same investment might be sold for either plus or minus $X. How quickly and to what extent that price can change from plus to minus and back is known as volatility. There are numerous financial instruments exposed to price volatility, such as stocks, mutual funds, real estate and gold, to name only a few.

The more averse a person is to risk, the more he might wonder, “Why would anyone want to invest their hard-earned savings in financial instruments that could go down in value?” The answer of course is: the potential for greater returns.

There are many financial instruments to choose from when you are determining how to invest your retirement savings. Your choices can include anything from bank CDs, bonds, annuities, precious metals, real estate, stocks, mutual funds and dozens of other options.

Many experts believe that at least some portion of a person’s savings should be invested in the stock market. The reason is that it is generally believed that these investments give their owners the best opportunity for the long-term growth that can play an essential role in helping to manage the risks of inflation and the possibility of outliving our savings.

Generally speaking, in spite of their volatility, securities and stock market-type investments have had a fairly impressive record of providing returns over the long term that few other types of investments have been able to match.

However, there is of course a potential downside associated with stock market investments: they are also typically much more volatile than many other types of financial instruments. Because of this volatility, the prices of stocks and mutual funds can go up but they also can go down. Sometimes these drops in price last for only a few weeks or months, but it can also take years or even decades before they might rebound.

For example, the combined effects of the tech bubble in the early 2000s and the financial crises in 2008 contributed to a ten-year period that was not particularly kind to stock market investors.

• $100,000 invested in an S&P 500 index fund in January 2000 would have been worth $89,072 by mid-December of 2009. Adjusted for inflation, the returns are even worse. That initial $100,000 becomes $69,114 at the end of the decade known as the “aughts.” (Source: Burstyn, Gerald. “A Lost Decade for Advisors?” Research Magazine Nov 2011.)

There have been a total of 85 years between 1926 to 2010. During this period, there were a total of 24 single years when the S&P 500 index experienced a loss. There were a total of 11 five-year periods that would have resulted in a loss. And, there were four ten-year periods that saw a loss.

(Source: Ibbotson® Stocks, Bonds, Bills, and inflation® (SBBI®) 2011 Classic Yearbook” from Morningstar®. Past performance is no guarantee of future results. The Standard & Poor’s 500® is an unmanaged group of securities and considered to be representative of the stock market in general. An investment cannot be made directly in an index.)