Financial investments are part of most retirement planning portfolios. Within the investing community, there's a maxim that time in the market is better than timing the market. This means that it's better to invest over a long period than to try to make a few big scores on the right investments. People often wonder why this is the case, so here are three reasons why a retirement planning advisor will want you to focus on time.
The value of compounded returns is very hard to beat if you have enough time. Advisors constantly emphasize the importance of starting retirement planning as early as possible. If you have 10 compounding periods, usually years, a $10,000 balance at a 5% interest rate will become more than $16,000.
People often think of compounding as being solely about interest rates. For most folks, their math teachers introduced them to the concept of compounding through compound interest on bank accounts. However, all returns can compound with planning and reinvestment.
Advisors frequently encourage clients to keep a percentage of their money in the stock market. The reason is that the S&P 500 produced an annualized return of 9.4% from 1972 to 2021. For the person who kept reinvesting their returns starting in 1972, time in the market was very lucrative and permitted more than a respectable retirement.
Ups and Downs
One of the biggest retirement planning mistakes people make is freaking out when the market goes down significantly. Long-term financial investments depend on these downturns, though. The opportunity to buy good stocks effectively on sale makes a huge difference. You have to be in the market, though, to have these opportunities because they may only appear a handful of times in a lifetime. Once more, time in the market matters.
Derisking with Age
Time can become your enemy the closer you get to retirement. If a downturn strikes right before you plan to cash out, you could be talking hundreds of thousands or even millions of dollars in diminished returns.
A retirement planning advisor will usually encourage clients to de-risk with age. People in their twenties have decades to make back losses, and they should be investing like crazy during downturns. Someone in their 50s, on the other hand, may need to move some of their exposure from financial investments like stocks, speculative real estate, and crypto into steadier income producers like bonds, rental properties, and annuities.