Failure to Participate Until Retirement
This is the real risk. That you will quit contributing to your Sharebuilder account every month. You might get discouraged during times of a declining market. It’s tough to see the value of your most important asset, losing value. But this is when you should be rejoicing. Every one of your dollars that you invest during this declining market will buy more shares than they would have when the market was up. These additional shares will ALL increase in value when the market turns around as it invariably does (see History Is On Your Side, Dollar Cost Averaging).
You have to have confidence that the market will recover, as it always has. If you don’t have that core, fundamental belief, then you shouldn’t be invested in the markets at all. Keep investing, no matter what; it’s that simple.
Risk of Losing Purchasing Power
Purchasing power is the real coin of the realm. You can lose purchasing power because you have less money or you can lose purchasing power because your money won’t buy much. Inflation is a constant, persistent and insidious truth. If you limit the performance potential of your portfolio by loading up your portfolio with “safe” (e.g. CDs or bonds or money market funds) but poor performing assets, because of fear of losing money, you will lose purchasing power.
Risk of Losing Potential of Alternative Investments
There may be some other investment alternatives that MIGHT get you more money. You might also lose a lot of money chasing them down. I did. Purchase only VTI and forget about finding a silver bullet.
Risk of Losing the Plot
This is about the risk of not investing continuously until retirement. Following the plan is a commitment to a long term investment policy. There will be all kinds of reasons for not making the monthly investment. The desire to skip “just this month’s investment” will be hard to ignore. The Plan is a “set and forget” plan. Easy to follow, simple to execute, no more having to use energy worrying about what to do.
Risk of Losing Faith
If the market is down for 2,3 years in a row, it is easy to become discouraged as you see the value of your holdings decrease. You give up. As has been demonstrated earlier, (see dollar cost averaging) these down markets are pure gold for someone who is in the “accumulation” period of the plan. You get more shares for the same amount of money. Later when the market recovers, ALLl those “cheap” shares increase in value and the total value of your portfolio increases exponentially.
Risk of Panicking
This is the “traditional risk” that Investment Advisors” caution against and it is the reason they recommend a diversified portfolio.
If the market is down, worse than losing faith and giving up, you may be tempted to sell all now and then get back in when the market starts back up. This “market timing” is the worst strategy possible. You are guaranteed to “Buy High, and Sell Low”. You will lose lots of money with this strategy. It has been proven over and over.
Knowing when to get back into the market is the problem. Now? No Wait; Now? No; Now? OK- how much? All of it? Wait, the market just went down again. This behavior will whipsaw you in and out of the market until you have nothing left. Been there, done that. I have a horrible war story to relate about this strategy.
Risk of Listening to Advice, Chasing Performance
Taking your eye off the prize because, for a while, some other security is doing a lot better than VTI. But it never lasts. By the time you recognize a high performing security, it is at the end of its run and you will again , “Buy High and Sell Low”.
Trying to “beat the market”
Regular investments in a single security is not cool. Not much to talk about (except the performance of your portfolio – which, more than likely is better than your peers). You may be tempted to change things up. Try something new. DON”T. There are no strategies that will accumulate more money in the long run than this simple plan that I have given you.
Listening to “advice” from “professionals”
Investors are the recipients of constant advice. Tips abound. Can’t miss strategies are all around you.
Losing Potential of Diversified Portfolio
You may not believe that VTI can outperform most diversified portfolios. You may not trust the examples I have presented. As I indicated, I’m sure there are diversified portfolios that outperform VTI but they are nearly impossible to construct. Many have tried, few have succeeded.
If you feel you must build a diversified portfolio digest the contents of this website, Index Fund Advisors. It does an excellent job of presenting the case for a diversified portfolio . Index Fund Advisors is the only investment advisor I would listen to. Their advice is backed by solid research. Remember, diversified portfolios have their own problems.
The key take-away
Because investing evokes emotion, success depends on a long-term perspective and a disciplined approach. Abandoning a planned investment strategy can be costly, and research has shown that some of the most significant derailers are behavioral: the allure of market-timing, and the temptation to chase performance and the temptation to quit when the market goes into the tank.
Far more dependable than what the market is doing at the moment is a program of steady saving. Making regular contributions to a portfolio, and increasing them over time, can have a surprisingly powerful impact on long-term results
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