Investing in Stocks Offers Great Opportunities..But Watch Out for Short-Term Risks
Given the concern about Social Security, this statement, which you will hear from many different sources, needs some explanation and qualification.
First, it is historically accurate that, the stock market (defined as a broadly diversified portfolio of common stocks) has averaged about a 10 percent return. There is no 20-year period when this portfolio has lost money.
Markets Risky in the Short-Term
Now for the first qualification. If you are nearing retirement and haven’t started saving, heavily investing in the stock market is probably not a good idea.
The nature of the market is that it will go up and it will go down. The grand trend is that it has gone up more than it has gone down, but that will be of little solace if you need cash and the market decides to rest for a couple of years.
While many financial advisers suggest retirees and people nearing retirement keep some of their money in stocks as a protection against inflation, they caution that moving to more stable investments (bonds, cash instruments) is a prudent way to protect your nest egg.
Rule of Thumb
A good rule of thumb is that if you think you are going to need the money within five years, stay out of stocks. That may be a little too conservative for some investors who actively watch the market, but it makes the point that stocks are not short-term investments unless you are an active trader, which is not a recommended activity with your retirement account.
Most bear markets last just over a year on average if you look back at the market’s history. For long-term investors, this may be a nervous time, but it passes. However, if you are preparing to convert some or your entire portfolio to cash to fund your retirement, a year may seem like a lifetime – and remember, that’s an average figure, down markets have lasted much longer.
Conclusion
The stock market offers great opportunities, however it can be brutal in the short-term. Don’t race up to the last minute when you need cash and count on the market to be there for you.
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