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When Time Matters in Investing & Financial Planning

We are all familiar with the saying, “Don’t try to time the market.” However, timing does play an important role when it comes to investing; it’s time in the market that can have a significant, positive impact as well as when you deploy other financial strategies to optimize cash flow.

When we are young, just embarking on our careers and investing journeys, time is on our side. This doesn’t mean we can sit on the sidelines and watch the market pass us by. Investors should be intentional about their accumulation years and “spend,” or better yet “save,” them wisely. Often, this means we need to put our heads down, make a plan, and invest accordingly while drowning out all the negative headlines that tug at our emotions and can create reactionary behaviors driven by fear.

Drastic volatility in the market can bring out the worst in even seasoned investors. While some people fear volatility, there is a school of thought that considers it an asset class. I am neither defending nor attacking the position of volatility as an asset class; the key take-away is volatility exists in a range and has an average. When volatility appears too high or too low, we should expect it to level back out and return to a historic average, which makes it easier to weather the storm and see volatility for what it is. It is a nutrient that propels markets forward over time – not an immediate threat to destroying wealth. This then allows us to understand that responding to volatility with short-term, reactive attempts to time the markets will probably not help you achieve longer-term financial and retirement goals.

As investors approach retirement, time begins to take on new meaning. This is because the sequences of returns may matter much more in distribution years than they do in accumulation. Sequence of return risk will analyze returns in the order they occur and must be considered. They can have major effects on your investment portfolio and overall financial plan. The order of your returns over periods of time affects the internal rates of return significantly as money’s are either added or withdrawn. The withdrawing of your retirement funds in a declining market it means you can earn a much lower “internal rate of return” than what you expected. Conversely, in a rising market the outcomes will lend to higher rates of return for the investor. Hence Sequence Risk.

Below is a chart to use with the link to a full yet simple illustration to prove the point: