Posts Tagged ‘Timeframes’
Wednesday, February 29th, 2012
Among the most important things that good advisors bring is the ability to help clients make the right trade-off between risk and return … and also to help clients understand the critical impact of the time frame over which they hold investments on the volatility they experience.
One of the most important conversations these days is about the amount of risk that clients should take in their portfolios.
This month’s column in Investment Executive outlines three steps to make that conversation an effective one.
Step One: Talk about long-term returns
You could start by reminding clients of after-inflation returns for different investments for the 84 years from 1926 (as far back as we have really good data) to the end of 2009.
This compares large cap US stocks to intermediate, 5 year Government bonds and T bills. Note that you should frame this in terms of real, after– inflation returns — what really matters to clients investing for retirement.
Note that after inflation, stocks have returned three times bonds and ten times T bills.
Then translate that return into the real return on client portfolios.
For someone investing $100,000 in stocks, the after-inflation appreciation of $259,000 is almost five times that in bonds and almost twenty times the gain in T Bills, which just barely beat inflation.
Step Two: The odds of losing money
Next, talk to clients about the historical experience of losing money in stocks after inflation, based on different holding periods.
Historically, holding stocks meant that after inflation you lost money about one in three years.
Looking at three year periods reduces the chances of losing stocks to about one in four.
In ten year timeframes, investors lost money 12% of the time — based on the experience since 1926; you have to go out to twenty years to completely eliminate the chances of losing money in stocks.
Step Three: Communicate this visually
Finally, portray the nature of the experience in a way that investors can relate to.
Tags: Client Portfolios, Conversations, Critical Impact, Government Bonds, Holding Periods, Important Things, Inflation, Investing For Retirement, Investment Executive, Investments, Risk And Return, Stocks Bonds, T Bills, Three Steps, Three Times, Time Frame, Timeframes, Twenty Times, Twenty Years, Volatility
Posted in Dan Richards | Comments Off