Question: What is studied, analyzed, discussed and fretted over by more people than any other activity on the planet? Answer: The rise and fall of financial markets.
Despite this broad following, many investors are still surprised (and even shocked) when the markets drop – like they have in past weeks.
The market volatility (ups and downs) has lots of investors stressed and a little uncertain about how to respond. We’ve all heard the adage, “buy low and sell high.” Unfortunately, the knee-jerk reaction for individual investors who manage their own portfolios is to do just the opposite. They tend to:
- sell the equities that have sunk, and
- buy fixed income investments to float through the rough waters.
As a result, they lock in their investment losses and overpay for the short-term security that comes with fixed income investments. In essence, they sell low and buy high.
It’s precisely for this reason that investment professionals urge us to stay the course and keep a long-term focus. And that’s precisely what your Silver Thatch Pension Plan does.
As a member of the Silver Thatch Pension Plan, you can rest easy knowing that your retirement savings are managed under an investment structure designed specifically to help mitigate risk in the short-term – while helping to grow (and ultimately preserve) your money over the longer term.
This doesn’t mean your Silver Thatch account is entirely immune from losses. However, it does mean that you are protected from unnecessary risk and locking in your losses (intentionally or otherwise).
As a primary feature, your basic or “core” contributions are directed automatically to one (or in some cases, two) of the three available Profile investment portfolios – Growth, Balanced or Conservative – matched to your age, income and marital status. This unique structure helps to ensure that your core savings are invested in a way that keeps risk in check, while achieving the long-term returns needed to meet your personal retirement profile.
A focus on diversity
In general, investment markets do not all move in the same direction at the same time. What is good news for stocks is often bad news for bonds – and vice versa. And when one
The rise and fall of financial markets are a fact of life. The goal is to minimize the prospect of short-term investment losses by managing risk without eliminating the prospect for attractive investment returns.
Investing carries an element of risk for plan members. Here are some of the types of risk that Silver Thatch has on our radar screen.
- Capital risk – The risk of losing the money you’ve already saved.
- Currency risk – The risk that the value of your investment will be eroded by currency exchange.
- Geographic risk – The risk that the value of your investment will be reduced by an underperforming economy.
- Political risk – The risk that political instability or upheaval will affect the value of your investment.
- Timing risk – The risk that markets will decline shortly after you buy an investment.
- Inflation risk – The risk that inflation will go up more quickly over time than the value of your investment.
- Interest rate risk – The risk that interest rates will go up (which typically undermines the value of bonds and can have a negative impact on stocks).
While we can’t eliminate investment risk, we can manage it. The primary way to reduce the risk – inflation risk, market risk, and so on – is to diversify.
The Silver Thatch Profile portfolios are all well diversified. This is achieved by investing in a mix of:
- Asset classes – investing in a range of equities (stocks), fixed income (bonds), cash equivalent investments (treasury bills, money market) will largely determine your level of investment risk.
- Geographic regions – ensuring exposure to opportunities in Europe, the U.S. and markets around the world.
- Investment styles – such as growth or value funds, helping to offset significant under- or over-performance during extreme phases in financial markets.
The portfolios are also rebalanced on a regular basis – especially when market performance causes the asset mix to drift off target. When an asset class over-performs (or increases in proportion to other assets in the portfolio), the portfolio manager will sell a portion of the outperforming asset class and buy other asset classes to bring the asset mix back on target. This ensures that the gains are captured – and that the asset mix stays in line with the portfolio’s long-term objectives.
Finally, by making regular payroll contributions, you are taking advantage of a principle called dollar cost averaging. Rather than investing large amounts of money all at once, you are investing smaller amounts at regular intervals (e.g., each pay period). This way, you avoid jumping into the market with all your money just as the market peaks.