There are lots of market “truisms” when managing investments; “the trend is your friend”, “don’t fight the tape” and “bulls make money and bears make money but pigs don’t”. Wise words rooted in experience and most are correct for a while! Yet how are we to truly know when each is right? How do we know when the trend has changed? How do we know when we have quit thinking about volatility and risk as we seek greater returns?
A lot of people ask these questions and many businesses are built around trying to provide answers for investors. No one knows for sure (unless they have a crystal ball!) the answers to these questions, which is why we started www.401k-Checkup.com. We offer people a tool that helps them make better decisions about their 401k (and/or 403b, 529, IRA or Mutual Fund) portfolio.
Each of us is our own investment manager and all of us have access to information and tools. If we are going to do more with our investment account than open statements and wish we had more money, we have to figure out for ourselves how to make use of what is available and apply it to our own process of investing.
Sometimes a little basic math can be insightful. We think this example showing the effects of negative returns on a 401k, 403b or other type of investment portfolio might be helpful. Let’s look at a simple chart on how volatility affects average and compounded returns:
Volatility Effect on Average and Compounded Returns
| Case A | Case B | Case C | Case D | Case E | Case F | |
|---|---|---|---|---|---|---|
| | 5% | 4% | 9% | 15% | 25% | 30% |
| | 5% | 5% | 5% | -10% | -15% | -25% |
| | 5% | 6% | 1% | 10% | 5% | 10% |
| | 5.0% | 5.0% | 5.0% | 5.0% | 5.0% | 5.0% |
| 5.0% | 5.0% | 4.9% | 4.4% | 3.7% | 2.4% |
It appears a basis for the old fables of the “Tortoise and the Hare” and Aesop’s “The Ant and the Grasshopper” may be found in simple common sense. What is our point? In time all markets move toward their long term averages.
When things are unusually good for a long time we all tend to reason through why it is different now and the good times will continue indefinitely. The reverse is also true; bad periods seem as if they will never end. The lesson we take is to try and control or reduce volatility and risk by staying committed to a process for checking both our 401k performance and our goals.
We hope you find that our 401k-checkup tool can add to your investment management process. Good luck.
401k-Checkup Team
www.401k-Checkup.com
It’s a tool, not a rule!
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