Since this issue of Lynchburg Business features businesses in existence over 100 years, it’s fitting to take a step back from the day-to-day headlines on CNBC or Bloomberg and examine the long-term trends, and long-term questions, regarding financial markets, investing and our own personal finances. First, though, let’s look at the short term.

Where will the markets be tomorrow, next year and three years from now? We have no idea. The best of the best, Warren Buffett, admits as much. If your financial advisor claims to know otherwise, it may be time to shop around.

Where will the markets be in five and 10 years? Here, we have a better idea—but indeed no certainty. Over time, in the history of this country, equity (stock) markets have been positive for the majority of five- and 10-year periods, but not all of them.

Where will the markets be in 15 years? Now we’re getting into fun territory. While nothing is 100 percent certain, if history is our guide, there’s a fairly high chance that markets will be higher 15 years from now. Make that time frame longer, and the historic performance of the stock market over time would indicate that positive results are likely.

Why, then, do we focus on the day-to-day headlines?

We live in an instantaneous society. We expect answers to emails right away—and text messages even sooner! There are financial networks that wouldn’t have much programming if they told the valuable truth: today’s headline likely doesn’t matter.

What does it mean to take the long view? How can historical perspective shape our own finances? Here’s where proper asset allocation and financial planning comes into play. Asset allocation is simply another way of labeling the mix of investments you own. These could include stocks, bonds, CDs, real-estate, precious metals, and even more broadly, other assets such as life insurance and annuities if you happen to have them. A financial plan that examines your holdings in the above assets should also take into account known income sources like social security and pension income. Putting it all together, before you even decide how much (if any) stock market exposure is in your investment asset mix, you should first be able to answer this question: When will you need the money to meet your living expenses or other spending goals? It is the answer to this question—not your age, not your retirement date and not some silly formula from an online calculator—that should primarily dictate your asset allocation. Couple that answer with the likely long-term market performance metrics mentioned above to determine an investment strategy for you.

Suppose you’re retiring tomorrow AND your pension, social security and other known income sources won’t allow you to meet your monthly living expenses. In that case, a mostly conservative asset allocation may make sense. Now suppose your neighbor is the same age and is also retiring tomorrow.

She has no debt, lives modestly and has a decent pension from a prior job.

Her pension, combined with her social security, cover her monthly living expenses. Her asset allocation could stand to have a much higher percentage of equity (stock market) exposure. This is because she doesn’t need the money to live off of and isn’t going to need to draw from it at any time in the foreseeable future. You and your neighbor are the exact same age with the exact same retirement date but your unique circumstances, in my opinion, would dictate very different investment strategies.

At the heart of those investment strategies is the long view. There should be a very big difference in your strategy for long-term money and short-term money. Any money you’re going to need in the next five or so years likely should be invested in very conservative, low volatility assets. Money you’re not going to need for longer than that might be mixed slightly differently. If you’re building savings, retirement or other investment accounts that you simply
won’t need to touch for 15 years or more, then you have time on your side!

You can afford to take the long view, be more aggressively invested and ignore the financial crisis of the day. In 15 years, it will likely be a distant memory.

Is your strategy subject to the crisis of the day or do you have a plan that takes the long view?

Disclaimer: This column is for informational purposes and should not be considered personalized investment, legal or tax advice. Everyone’s circumstance is different and individuals should seek advice based on their unique financial situation. All investments are subject to risk, including loss of principal.


By John N Hall, CFP®

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