After the recent market turmoil, a lot of folks are wondering, with good reason, just why they are invested in the stock market at all. The reason we invest (almost, but not all) our client’s money in the stock market is that it is an incredibly powerful tool to help you achieve your financial objectives. Investing in the stock market means taking risks, and you need to think carefully about the amount of risk that is appropriate for you, but if you focus on the long term, stocks can help you get where you want to be.
Dealing with Inflation
Inflation is a fact of life. A dollar buys less today than when you were a kid, and it will buy even less in the future. There’s no way around it. To maintain your current standard of living in the future, you’ll need to spend more than you do today. We don’t know how much more because the inflation rate is always changing, but we can put it in perspective. Over the 30-year period from 1985 to the end of 2014, the annualized US CPI inflation rate was 2.71% year. That means that a dollar in 1985 is worth a little bit less than 44 cents today. You need to account for inflation when you think about your financial goals.
Investing in the stock market can help you outpace inflation. Over the same period, the S&P 500 index had an annualized return of 11.35% per year. While you probably don’t want to invest all of your portfolio into stocks, their higher returns can help you get the most out of your savings.
Thinking about Risk
The higher returns you can get from stocks come at a price: more risk. You can be smart and focus on the risks that actually matter, but there are no guarantees with investing. We’ve seen some of the risk recently, but the pain can last longer than a couple days.
If we look at the S&P 500 index on a monthly basis, there are periods where it was down for seven straight months – from March 1974 until September of that year the S&P 500 index just kept going down. On an annual basis since 1926, we’ve also seen some long stretches where the market has gone down four straight years. The stock market is no place for short-term investors.
It can be a great tool if you’re focused on the long term. It all comes down to staying disciplined, which is a matter of setting an appropriate asset allocation for yourself. Very few folks can stomach being completely invested in the stock market. That’s perfectly fine. What matters is finding the right balance for you that allows you to participate in the higher expected returns of stocks, but also allows you to sleep at night.
If you can stay the course, the stock market can be a great tool for your long term financial goals.
All data courtesy of Dimensional Fund Advisors.
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McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
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