“Financial loss associated with taking risk is often overlooked by folks who are exposed to financial markets,” said Rick Parkes, Co-Owner of Diversified Estate Services, LLC.
Let’s start with “the math” and explain the realities of loss.
“As you can see in the picture, it takes MORE gain to recover from a loss than the original loss itself,” said Parkes. “This seems illogical, so let’s walk through a simple illustration:
If you have $100,000 invested into a mutual fund and that fund experiences a 20% loss, the resulting value on your next statement from the mutual fund company will show an account value of $80,000.
So, will a 20% gain get you back to even? No. Let’s crunch the numbers:
$80,000 x 20% = $16,000
$80,000 + $16,000 gain = $96,000 ($4,000 LESS than your original investment)
As we get older, our time horizon gets less tolerant to market losses due to the amount of time it may take to get a significant double-digit return just to get back our own money.”
The best defense to market losses is often thought to be proper asset allocation and diversification.
“I agree that risk can be mitigated by where you put your money, but, often, diversification is done by buying multiple funds all exposed to the same market risk and really providing little cushion to the economic risks associated with investing in the market,” said Parkes.
An old formula, with a new twist, may provide a greater level of safety. The old rule of thumb was simply allocate your age to safe savings vehicles like CDs, bank accounts and find insurance company products like cash value life insurance and/or annuities.
As an example, a 65-year old couple using this formula would put 65% of their money into these safe vehicles and allocate only 35% of their assets to risk. So, the risk assets are calculated by taking 100 minus your age.
The new twist is what to do with the 35% you allocate to risk-based retirement funds. Based on new findings, like those recently published by the Putnam Institute, about how much money should be at risk in the stock market, they concluded (as reported in MarketWatch July 11, 2011 article: Retirees Need Less Stocks, More Annuities) “Retirees should invest just 5% to 25% of their portfolio in stocks, or at least that’s the case for those whose primary goal is to minimize the risk of running out of money and sustaining their withdrawals.”
A possible way to build even greater security into your retirement planning would be to only put into stocks and stock mutual funds 100 minus your age. If you add this to the tried and true safety formula, the math on a $100,000 account for a 65-year old would look like this:
This formula appears to conform to the new research suggesting the reduction of overall market risk when future retirement income is the ultimate goal of your retirement planning.
For more information on this topic, or to learn how Rick Parkes can help you, please visit http://www.desllc.org.
About Rick Parkes:
Rick is co-owner of Diversified Estate Services, LLC and Retirement Investment Strategies a comprehensive financial advisory firm. Diversified Estate Services, LLC and Retirement Investment Strategies is a firm that specializes in assisting individuals to gain clarity, balance and focus which empowers them with confidence. He teaches the powerful knowledge of retirement planning to attorneys, CPAs, and the general public.
Rick Parkes industry designations include Life Underwriter Training Council (LUTC) and Certified Retirement Financial Advisors (CRFA). Rick is also a radio talk show host.
Rick's firm is a proud member of the Better Business Bureau with the highest rating A+, where he is pleased to instill customer confidence of nearly 1,000 consumer’s inquiries. Rick is also a member of the National Ethics Bureau, where he successfully passed the Ethics Check System™, a rigorous eight-point background check for criminal, civil, and business violations.