Market volatility continues as another round of scary news headlines from around the world have pushed prices down in recent weeks. Investors are tempted to accept very low interest rates on bond investments because they are more concerned with the return of their money than the return on their money. Who can blame them?
But this may be a mistake for those planning to fund a lengthy retirement. Despite slow economic growth, inflation remains a silent threat for those of you who may have longevity in your family. While the current 1.3% inflation rate is historically low, it can pose a problem for investors who are hiding in fixed-income investments.
Investors willing to lock in a rate for 10 years on a U.S. Treasury will get 2.1%. Depending on your combined federal, state and local tax rate, this could mean a loss in real purchasing power—after taxes.
Due to their price volatility, stocks may be scary to own, but they may also be your best inflation fighters. Stocks fluctuate in value but have historically beat inflation. Since World War II, diversified stock investors have enjoyed returns of 4-5% above inflation. Although some forecasters say that those days may be over for a while, they also admit that diversified stock investors should still hopefully be able to earn 2-3% above inflation.
It may feel painful as you wait for those returns—there will be plenty of periods when stocks lose value and the markets look scary. But investors who buy and sell—rather than staying invested—routinely make timing mistakes, ending up with much lower returns than they would have if they ignored daily news and stayed invested.
Do not let short-term, daily fluctuations of stock and bond values derail you from a successful investment experience. Work with a qualified investment professional to design a risk-appropriate, diversified portfolio that you can live with no matter what the daily news headlines might be. Let me encourage you to be a smart investor. You owe this to yourself and your family.
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