Sunday, June 12, 2011

Risk vs. reward: It's the investment game we have to play

Investors (I would be among them) battered by six weeks of stock market declines may be wondering if there's more to come. My view is no. In fact I'd say the recent sell off has been over done in light of the world economy. For instance:
- Economists still expect the U.S. economy to grow by 3 percent this year and another 3.5 percent in 2012. That's not great but certainly better than the past couple of years.
- The U.S. budget deficit is starting to narrow. Oh we're still way under water but an improving economy means better tax revenues going forward. Most experts don't expect the deficit to get any worse.
- The earthquake in Japan has had a big effect on our economy because of supply problems. Manufacturing has slowed because of parts shortages from Japan. But this problem is temporary.
- This week banks seem interested in rescuing Greece.
- The U.S. trade deficit is narrowing because the weak dollar makes our stuff less expensive and more attractive on world markets. Some of our biggest and best companies are doing well globally because of this interesting situation. Yes, it's more expensive to travel abroad but the dollar is helping our economy by giving our businesses a better competitive position relevant to our competitors.
- China is still growing at 10 percent a year. India's economy is perking along at 8 percent.
Because of all this, many think this slow down will be short-lived.
That's what I've been telling myself this week as more than half the gains I've made in my 401(k) rollover have evaporated. But while disappointed, I'm not panicked.
I'm in this for the long haul. I'm withdrawing less cash than the dividend return on this account. That's my plan and I'm sticking with it. And with no where else to go, I'm stuck with the U.S. economy and the S&P 500. I'm still up from where I started last fall when "retired.". I am really doing just fine.
I am not discounting rising energy and food costs for the negative impact they've had on consumer spending, but we ARE seeing job growth, just not as much lately as we'd like.
Sarah Max at Fidelity Investments addresses the issue of risk versus reward. She points out that "unless you’ve saved more than you need, the risk of outliving your money is just as real as the risk of losing it in the stock market."
With interest rates at zero and inflation likely to eat up buying capacity, investors have no choice but to be in the market, develop a conservative lifestyle that allows their money to grow over the next 20 or 30 years despite withdrawals. The only way to stay ahead of the game, reports Max is "to invest in something that has some risk."
During an average market, a growth portfolio with 70 percent stocks, 25 percent bonds and 5 percent short-term investments should last 39 years with an annual withdrawal rate of 6 percent, say research analysts at Fidelity Investments. A conservative portfolio (20 percent stocks, 50 percent bonds and 30 percent short term) would last only 24 years.
According to Fidelity, in an extended market downturn, the conservative portfolio doesn’t fair that much better than the growth allocation --- it would last 19 years versus 17 years for the growth portfolio.
So with all this in mind, I'm sticking with my plan: Mostly blue chip stocks paying 3 percent or better in dividends, some bonds and some cash. I am also working part-time to let my portfolio grow a bit more.
The experts all say that my portfolio "can only reach its full potential if I'm willing to ride out the ups and downs." I guess I'm experiencing my first little test.

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