One argument underlying the notion of holding risky assets in long-term portfolios is time diversification. Time diversification holds that above-average returns tend to offset below-average returns over a long enough period. It’s based on the concept of reversion to the mean: Eventually periods of low and high returns converge back toward their average.
The inherent problem with average returns is that they may not occur during your investing period. Though the range of what’s considered to be typical narrows with time, there is the possibility of returns not being typical over your investing time horizon. The very good 10-year period of 1990–1999 and the lost decade of 2000–2009 are examples.
Returns can be above-average or below-average but still be typical. These are the more likely scenarios, though they are never guaranteed.
More on AAII.com
- The Sequence in Which Returns Occur Affects Your Wealth – This article demonstrates how merely changing the order in which annual returns occur will lead to very different outcomes for a retirement portfolio.
- Reduce Stock Exposure in Retirement, or Gradually Increase It? – One strategy for navigating sequence of returns risk is to reduce exposure to stocks heading into retirement and start raising it back once retirement begins.
Highlights from this month’s AAII Journal
- The Individual Investor’s Guide to the Top Mutual Funds 2019 – This popular guide helps to compare and contrast 727 funds. Plus, an expanded worksheet gives you detailed data on more than 1,600 funds.
- Older Workers Investing More in IRAs – A survey conducted by the Investment Company Institute found 68% of IRA-owning households were headed by someone age 45 or older.
AAII Sentiment Survey
The percentage of AAII members describing their outlook for stocks as “neutral” is now at a seven-month high. Plus, this week’s special question asked AAII members how they viewed the overall sentiment reflected by the market so far this year. More about this week’s results.
This week’s results:
- Bullish: 35.1%, down 4.8 points
- Neutral: 39.8%, up 2.5 points
- Bearish: 25.1%, up 2.3 points
- Bullish: 38.5%
- Neutral: 31.0%
- Bearish: 30.5%
Take the Sentiment Survey.
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The Week Ahead
The U.S. financial markets and our office will be closed on Monday in observation of President’s Day.
Fourth-quarter earnings season will remain busy even though the number of large-cap companies reporting is falling. Next week, 51 S&P 500 companies are scheduled to report, including Dow Jones industrial average component Walmart Inc. (WMT) on Tuesday.
The week’s first economic report will be the February housing market index, released on Tuesday. The minutes from the January Federal Open Market Committee (FOMC) meeting will be released on Wednesday. Thursday will feature the February Philadelphia Federal Reserve business outlook survey and January existing home sales.
Six Federal Reserve officials will make public appearances: Cleveland president Loretta Mester on Tuesday; Atlanta president Raphael Bostic on Thursday; and St. Louis president James Bullard, New York president John Williams, Philadelphia chairman Patrick Harker and vice chairman Richard Clarida on Friday.
The Treasury Department will auction $18 billion of two-year floating-rate notes on Wednesday and $8 billion of 30-year inflation-protected securities (TIPS) on Thursday.
Local Chapter Meetings
AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!