Financial Planning and Money Management
Financial Planning and Money Management
Get the straight facts about: -Retirement plans -Investment strategies -Investment products -Fees and anything else that is rarely discussed by the financial industry.
Blog By:
Kon Litovsky
Kon Litovsky

Managing Investment Risk Part 1: Market Risk

12/23/2013 5:08:36 PM   |   Comments: 0   |   Views: 5417
This chart can put everything in context:

Figure 1.  Missing ten best days.

All this says is that markets are extremely risky, with majority of gains and losses coming in a very short period of time.  So anyone planning to retire and make withdrawals better manage risk, or else:

Figure 2. 'Monte Carlo' analysis -  multiple scenarios based on past market history.

Figure 2 shows that a retiree who invests even as little as 50% of their money into the stock market will be severely disappointed if the markets do poorly.  The takeaway is that if you put your trust in the markets, you might end up short, and significantly so if the markets underperform for an extended period of time.  Some may say that his has never happened before, but the period from 2000 to 2010 happened just recently, and many people lost a lot of money, and possibly more than once.  Others may say that all you have to do is hold on for your dear life.  But S&P500 returned 0.4% in the decade from 2000 to 2010 - so this approach would have been just as bad, especially if you needed to make principal withdrawals from the market over that decade.

You also need to diversify your portfolio globally and manage investment risk.