Losing the Race by Chasing Returns

 

Throughout the last 30 or so years we have been exhorted and encouraged to place a great deal of reliance on qualified plans, such as our 401(k), to fund our retirement.

Qualified plans are supposed to provide us with the income we need in retirement. It’s the approach that is embodied by the financial counsel we hear or read every day:

“Stay in the stock market, ride out the down-turn, the market will rebound.”

“Invest for the long-term.”

“Focus on your rate of return.”

Let’s consider the 401(k) plan once more. Many people have a very large percentage (if not all) of their retirement “savings” money situated within mutual funds in a 401(k).

But remember, a mutual fund is an investment vehicle,  subject to loss at any time.  Saving and investing are not the same thing.  You invest for greater growth at the risk of loss.  You save for moderate growth with security, stability, accessibility and minimal risk of loss.

Control…or Lack of It…

You do not have control over how your mutual funds will perform in the marketplace. Clearly, we all want the stock market to go up and the value of our 401(k) funds to increase.  But what if this doesn’t happen and you lose money inside your qualified plan?

Mutual funds are operated by money managers. Does the fund manager lose money when you lose money? The money manager may lose sleep, but not money. The fund manager still gets paid and the institutions still collect their fees.

You’re the only one who loses. Your money is at risk, not theirs. Their ultimate loss is that they may lose you as a client. However, it’s you who have to endure the consequences of losing your hard-earned money.

When you are chasing a rate of return, you are not focused on what would happen if you lost your principal. Instead you concentrate your energy on possible gains. You do not think about how you would cope if you lost some or all of your initial investment.

 

Chasing-ReturnsLoss of your original capital is critically important to consider since the greater your loss, the harder it is just to get back to your starting point.

When you combine the loss of your original capital with the erosion of your wealth due to taxes, inflation, and fees, the financial result can be, and often is, devastating. Also, as you get older, you have less time to recover from the effect of loss.

At some point in your financial life, you need to decide whether you want to chase a return or create a financial strategy.

An effective financial strategy will consider growth.  But the cornerstone of your lifelong financial strategy should be a solid foundation of security and stability.