If you’re going to sail into retirement with a nice fat portfolio and big sacks of money strewn across your deck, then you’re going to have to deal with some ups and downs along the way. Financial markets are volatile by nature, and how you respond to these critical, anxiety-inducing periods can make the difference between a meager retirement, and a life of luxury.
Regardless of whether you’re a seasoned investor, or someone just getting started, it often helps to review the most basic fundamental principle that underlies all of investing: compounding. If you truly understand the power of compounding, then you recognize that beyond any other force, it is time that exerts the greatest influence on your investment portfolio.
The unfortunate reality is that nothing in this world is certain. In fact, the only thing in life that is certain … is that nothing is certain. This is especially true when we talk about money and investing. Since we can’t deal with certainties, we’re forced to deal with probabilities. Therefore, probabilities become the lens through which we must view all things investment related.
Anyone who’s been around for longer than a couple of decades knows that stocks can lose a lot of value quickly. These periods, when stock prices are falling, can be classified into two types of declines: corrections, and bear markets. Understanding the difference between these is critical, because the former represent minor speed bumps on the way to higher prices, while the latter can wreck your entire portfolio and set you back years from reaching your retirement goals.
