Wednesday, December 3, 2014

Why I’m not Getting Greedy with My Retirement Account Returns

Stock markets have been on the rise lately, and some have even hit all-time highs in 2014.  This doesn’t mean I’m getting greedy with my retirement account returns though.

A recent US New & World Report article noted, “Dave Ramsey has become famous for a startling claim. He says stocks have returned an average of 12 percent over the long term. And he expects a 12 percent return over the long run going forward, too. On his website he dedicates at least two pages to his claim.”

It goes on to note, “In one article, “The 12% Reality”, we learn that Ramsey is "using a real number that's based on the historical average annual return of the S&P 500." The article claims that the "current average annual return from 1926, the year of the S&P's inception, through 2011 is 11.69 percent." In a second article, Ramsey declares you can find mutual funds with a track record of 12 percent returns for the past 70 years.”

12% returns sound great, but I know that to get them, I might be taking some risks with my money.  And while it would certainly further my retirement account balance to get such returns, I’m not going to chance them in the name of greed. 

The greater the upside, the greater the downside
Over the years, I’ve realized that when it comes to the stock market, where there is greater chance for reward, there is also often greater side for potential risk as well.  While this isn’t necessarily the case in every type of market investment, for me personally, when the returns seem too good to be true, they often are.  And even if they are good while the market is up, the losses can be just as big when the market is on the decline.  Therefore, while a 12 percent return sounds great, and may be possible when the market is on the rise, I’ve seen just how quickly the trend can reserve itself (i.e. the financial crisis) to quickly eat away at those big returns and then some when the market falls.

Stable rates of dividend reinvestments
With stock market volatility one of my investment concerns, and the main reason I tend not to get greedy with my retirement account returns, I prefer something that offers me stable returns over the long haul and has the ability to grow my money at steady rates.  This is why I like dividend reinvestment funds.

The fund that I chose for my retirement account has been around for over 40 years, has proved itself over time, rises and falls with the stock market’s hills and valleys, yet not with as much volatility as certain riskier funds, and pays out monthly dividends that yield in the range of 5 to 6 percent annually.

Dollar cost averaging over time
As a self-employed individual with little spare income to devote to retirement savings, I enjoy having a dividend reinvestment fund at my side when it comes to retirement planning.  With monthly dividends paid out, and then reinvested into the fund as additional shares, I’m able to grow fund value, buying shares at a variety of prices, thereby enabling me to dollar-cost-average my fund purchases over time and over share price without putting an additional dollars of my own at risk.

This is a true benefit for someone like myself, and keeps me from getting greedy with my retirement account returns since the whole thing kind of takes care of itself without my having to meddle in it.



Disclaimer:

The author is not a licensed financial professional.  This article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.