When saving for a major financial goal – planning a big wedding, buying a home, paying for a child’s college or even retiring -- the most important thing is to start. Even if you’re only able to set aside a small amount, if you invest it wisely, that sum may grow over time. The more you add, the more quickly the account total may accumulate as investment gains potentially compound over the years.
You can check in periodically to see if you’re on track and the amount you’re saving and investing is on pace to equal the money you’ll need when the time comes (with some margin for error). But what if you’re off track? Some investment advisory accounts, like Morgan Stanley Access Investing, can inform you when you fall off track on your goals [this is awkward wording.]. If that’s the case with your account, you have plenty of company.
Time Is Your Friend
The good news: As long as you have time–at least five years for lesser goals, more time for the bigger ones, like retirement– you can adjust. This year, the stock market has been volatile and is slightly negative, which may have eroded some of your progress. That is likely only a temporary setback however, since markets have risen over time historically–and more reliably the longer you stay invested.
Volatility is an unfortunate feature of getting access to that growth. But buying and selling stocks in an effort to catch upswings or avoid downturns is generally a foolhardy approach. That’s why we advise investors to take full advantage of their greatest asset–the naturally occurring multi-decade time horizon of many of their goals–to get invested and stay invested–not to try to time the market.
Instead, here are the four basic ways you can try to get back on track:
Stretch out your time horizon: Planning a trip to Spain to go running with the bulls? Maybe you can put off your trip of a lifetime for a few extra years. That will give you more time to save, and for your earnings to accumulate. It can make a big difference.
Downsize your goal: Buying a home? If you’ve missed your target, you may not be able to get everything you’d hoped for in a new house, but that doesn’t take you out of the market entirely. You may find you can be quite happy with the home you can afford, even with your reduced budget.
Increase your investments in equities: Stocks are more volatile than bonds and cash, but given enough time, their returns are also potentially higher, sometimes significantly so. When investors increase their allocation to stocks in their portfolio, they take on more downside risk (risk of a portfolio decline during market corrections), but if they have a long enough horizon, they also increase their potential ability to achieve their goals. I recommend making a move in this direction only if you have a long time horizon, and are able to tolerate seeing somewhat sharper losses in your portfolio without panicking and selling, which can make matters worse.
Save more each year – or better yet, each month. This may seem like the most difficult of the four options, but if you can put aside even a little bit extra per paycheck, it can put you on a path to achieving your goal.
Don’t view these options as a menu where you pick one and are done. Instead, if you’re off track, see if you can do some of each. You will find that the size of the adjustment you have to make for any one option, like increasing savings, will be much less if you make a few adjustments rather than trying to simply pull that one lever. How much of each option you choose will depend on your own individual circumstances.
A Skiing Analogy
As a recreational skier, I often think of the process of setting and refining goals like shopping for a pair of skis. You can choose short skis, which are more maneuverable, curved skis, which are great at sharp turns, or broader skis that float nicely on loose snow. Each has their disadvantages in certain kinds of terrain but require making trade-offs for others. For most people, the most desirable solution is one that strikes a balance between options. In skiing, these are called “all-mountain” skis. I suggest an all-mountain parallel in planning for your goals.
Here’s an example: Imagine reaching age 55 and realizing you are off track to be able to retire at age 65. You could get back on track by postponing retirement to 67 (but that’s two more years of work) or by increasing your equity allocation to 70% from 30% (but that’s a lot of risk for someone planning to retire in 10 years). Better yet, you could save $500 more per year ($41.67 a month), lift your allocation to stocks to 50% and plan to retire at 66.
That would be the all-mountain version of a retirement fix. It’s a package of compromises that aims to close the retirement funding gap by smaller, potentially more palatable changes across a range of levers. My recommendation is that investors who are off-track on their goals consider a similar package of moves and stick with them. It takes fortitude, but as you reach the long-term financial goals you’ve set for yourself, you’ll find it well worth the effort.
Dan Hunt, Senior Investment Strategist