You might think that we could all agree on the definition of financial success. But some people choose the wrong metrics to mark their progress toward a healthy fiscal future -- and in so doing, put their retirements at risk.
According to a recent Fidelity Investments survey, 55% of investors consider their portfolio a successful if it achieves any positive gain in the current market. Another 23% consider breaking even on their investment to be a success.
That's just crazy.
Granted, breaking even has been pretty good as of late. In 2008, the S&P 500 crashed by almost 40%. In that environment, if you ended the year breaking even, or posting even modest gains, you'd be very justified in considering yourself successful.
But fast-forward to 2009, when stock market gained about 26%. In that environment, would you really consider it successful to have ended the year with the same amount you started with?
If you're saving for retirement, you're better off measuring your success against a benchmark such as the S&P 500. If the individual stocks you pick aren't beating the S&P after a few years, you might achieve superior returns by parking your long-term money in an index fund instead.
If you're only hoping to preserve your nest egg, not expand it, it can make sense to consider breaking even or posting any positive gain as a success. But since most people haven't yet accumulated all the money they'll need for retirement, this situation generally doesn't apply.
Even if it does, simply breaking even won't help you keep pace with the pernicious power of inflation. Since inflation boosts prices over time, breaking even will still allow your money to lose purchasing power every year. Over 20 years, a 3% annual inflation rate will cut the purchasing power of your nest egg roughly in half. To truly preserve your portfolio, you should tweak your definition of success to keep pace with inflation.
Above all, have a realistic perspective on the stock market. Even though its long-term trend is up, you'll go through good years and bad years -- some sharper than others.
The Fidelity survey found that 47% of investors would like to see a period of six months to a year with no significant market volatility before they'd feel comfortable increasing their investments in the market. Alas, even after five calm years, there's no reason why the market won't spike up or down the next year. Moreover, market turbulence can bring amazing opportunities to buy stocks on the cheap, if you're prepared to pounce on them.
Don't settle for treading water with your investments. True success means seeing your money grow enough to reach your financial goals. Make sure you invest accordingly.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.