Not familiar with that particular term? Passive investing is a hands-off strategy centered on low-cost index funds that track broad market indices. Investors can buy and hold these investments for long periods or even a lifetime.
Passive investing has revolutionized the way we save for retirement and eliminated the need for a fancy stockbroker with a cigar to pick the hottest stocks for you.
So when a market heavyweight like Vanguard weighs in with a prognostication of stagnant growth over the next five years and a pronounced possibility of a market decline in the near term, you listen!
Is a 10% drop in the cards? Maybe — but who cares?!?
According to Vanguard’s research, a market correction could be close at hand. The asset giant now believes there’s a 70% chance of a correction in the near future.
(Editor’s note: A correction is defined as a 10% decline in the value of the overall stock market, while a bear market indicates a decline of 20% or more.)
Now, you may throw your hands up and say, “Well, that’s the nature of the stock market. There’s always a chance of a correction looming.”
And you’d be right.
However, Vanguard’s research notes that there’s a 30% higher-than-average risk of correction right now than there’s been at any time over the last 60 years.
In addition, Vanguard chief economist Joe Davis is forecasting tepid stock market returns of between 4% to 6% over the next five years.
All of which is cause for concern — unless you understand that investing is a long game and staying the course wins that game.
“In our view, the solution to this challenge is not shiny new objects or aggressive tactical shifts,” Davis writes. “Rather, our market outlook underscores the need for investors to remain disciplined and globally diversified, armed with reasonable return expectations and low-cost strategies.”
Long-term investing is about tuning out the noise
Clark Howard has often talked about tuning out the noise of the day’s headlines and keeping your eye on the goal.
For some people, that goal is financial independence as early as possible, long before your peers do. For many others, it’s a well-funded retirement so you can quit working when you want, on your own terms.
If you’re putting in money through a retirement plan at work and have a lengthy horizon until you have to use that money, just keep going along paycheck by paycheck with your investing. That’s called dollar cost averaging, and it can make you a fortune over time.
But the thing about tuning out the noise is of no use to you if you’re retiring very shortly.
If you plan to retire in the next three years or so…
In your case, it might be a good idea to rebalance your portfolio and take some money out of the game if you’ve had a nice run-up in the value of your 401(k) at work.
The basic idea as you age is to progressively shift more of your money away from stocks and move it into bonds, which are generally less volatile than securities.
If you’ve built up substantial assets over a working lifetime, it’s also a good idea to check in with a fee-only financial planner.
A fee-only financial advisor earns a flat fee to structure or restructure a portfolio for you. They don’t work on commission, so they shouldn’t steer you toward investments that might have a high commission for them, but that are only marginally suitable for your investment goals.
But for everybody else…
If you don’t need the money for seven or more years, then just ignore the frothy valuations of stocks and the looming correction and keep on investing!
You can’t time the market —but time in the market is what makes you money over the long haul.