If you are like most people, you have been brought up to believe that you should lock your money away in a reasonable yielding investment to allow compounding to increase your initial deposit over the years and give you a valuable resource for your retirement.
The recent economic events that began with the U.S. financial crisis may have caused you to question if this maxim still applied, particularly if you are one of the many investors who witnessed their retirement accounts plummet by up to 40%. It's especially hard when there isn't anyone to blame as it seems to be just 'one of those things'. Some people wonder if they were being foolish in the first place, and whether they should just enjoy their money now and forget about planning for the future.
It doesn't really help much when people say that the markets, on average, have outpaced inflation and are the best place for your long term investments. This statistic may be true, but 'average' doesn't matter if you are personally affected by market volatility.
What is the alternative? You can put your retirement savings in a bank account, and earn interest which will probably never keep up with inflation. Or you can try to time the markets, and hope to do better than so many other people who never see market declines coming.
To follow the market timing route, you should be prepared to be constantly involved in monitoring your investments. Even then, with 90% of would-be short-term traders losing money and giving up after six months, the odds of the average Canadian investor selecting a profitable series of investments are not very good.
Experiencing a short-term portfolio loss is never easy to stomach, but market volatility is the price that investors must accept to keep their portfolios growing over the long-term. After all, most people know enough not to have most of their money in equity investments if they need it in the next few years.
The most recent market decline is precisely why experts advise anyone nearing retirement to move the emphasis of their portfolio from equity investments to fixed-income investments and other more conservative accounts - where cash is readily accessible to replace a pay cheque.
You may have heard the statistic that if your money was out of the market on just a handful of selected days - those with the highest gains - over the last few decades then your portfolio would be substantially smaller. What you may not realize is that most of those high profit days occurred within 12 months of a market crash, as part of the initial recovery.
If you pulled your money out as a reaction to short-term losses, you stand a good chance of missing out as the economy regains momentum. Now is a great time to re-examine your portfolio to ensure you have the proper asset allocation to match your risk tolerance and your personal financial goals.
For those investors following the Dollar-Cost-Averaging investment strategy, the market volatility during the past few years has provided an amazing wealth building opportunity.