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401 (k) Archives -

19 Mar


The Secret to Investing Safely: Time

March 19, 2014 | By |

Many investors already know that it is important to invest in a variety of asset classes and even mix up the styles of investments. However, there is another dimension to diversification that many people surprisingly miss: time.

Carefully utilizing time can be among the most powerful weapons at an investor’s disposal. The good news is that it is also the easiest of all investment tricks to employ.

Many people already know that it is critical to think about the long-term picture and let the “magic of time” smooth out volatility. But it is actually more important to make sure to properly space out the period you invest and the period you withdraw.

I call it “trickle investing,” because the secret is to only invest a little bit each year into various asset classes over a period of a decade or two. Then you leave it alone. Most critically, make sure that after you retire, you don’t make any rash changes to your investments. For each year you are in retirement, only pull out of your investment account the amount you will live off of for that year. It would be around the same amount of money you invested each year in your 40s and 50s.

But you may ask, “What if I end up fully invested and the market crashes?”

Let’s say you selected the worst possible time to be fully invested in the last century – in other words, you were big-time unlucky! So long as you followed the philosophy of trickle investing, your portfolio still would have grown larger than if you had just left the money in the bank.

In this case, you started investing a little each year into a broad portfolio of stocks and bonds in your 40s, and then retired at 65 years old in 1930, when you had the maximum amount invested. The timing for you could not have been worse. Yet, so long as you didn’t panic and only took out each year the same amount you put in during the investing years, you ended up being able to live off of your investment portfolio well into your 90s. Whereas, if you had left all your money in the bank, you would have exhausted your funds around your 85th birthday. I explain this model in greater detail in my book, “The Safe Investor.”

Why did it work out so well, despite your bad luck? B