Over the last 15-20 years there have been amazing advancements in technology, and the amount of industries that have been changed through these advancements is countless. One of the most changed industries is finance. From being able to log in to your retirement account and initiate changes at a moment’s notice (instead of going through a broker), to being able to buy and track mutual funds and stocks online with the click of a button, the industry has truly changed to be more efficient and user friendly.
While most of the advancements have been good, one that I have found especially useful has been the free portfolio back testers, which allow you to search up specific investments by their ticker symbol and see information such as annual returns, biggest high to low drops, period of time to recover losses, and average growth over a long period of time for that specific investment. Luke 14:28-30 says “For which one of you, when he wants to build a tower, does not first sit down and calculate the cost to see if he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who observe it begin to ridicule him, saying, ‘This man began to build and was not able to finish.’” Reading that verse makes me realize how important it is to save for retirement, and to take advantage of the tools that can help us build our futures.
As we grow up we work hard to develop a comfortable lifestyle. We develop habits and hobbies based on what our earned income allows us to do. I think it also makes sense that we would enjoy those things when we enter retirement. However, a lot of times people can’t enjoy those hobbies in retirement because there was insufficient time spent planning for the future.
That’s where taking some time to plan how long you expect to work, and in how many years you will need the money, will help you in achieving your goals. Once that is set, you can take advantage of some of the free tools that are available online to make sure that the investments in your portfolio also match with the length of time that your money will be invested. With the free portfolio analyzers, you can see how much of a decline in your portfolio you can expect from top of the market to the bottom in case of a major market decline. You can also see the worst and best year performances. You can see how long on average that mutual fund takes to recover losses, and how risky it is compared to the overall market.
With the advancement of the technology, it is now easy to do by Googling “portfolio back testing”. A website I have used in the past is www.portfoliovisualizer.com; select Backtest Portfolio. All you need is to pick up your brokerage statement and write in the ticker symbols and the website does all the number crunching. For example, based on historical returns, an all equity mutual fund can lose up to 50% of its value in a downturn, and can take about 4-5 years to recover. A corporate bond mutual fund can lose approximately 16% in a market downturn and can take 1-2 years to recover, while a balanced fund that is split half equity and half corporate bonds will be somewhere in the middle. Now those are based on historical returns and different funds can vary. Being able to see how much you can lose and how long it takes to recover can be very helpful when making decisions for how long you plan to keep your money invested, and when you will actually need it.
With market volatility picking up over the last few months, and this economic expansion being 10 years old, taking the time to evaluate your portfolios and make sure they are in line with your investment time horizon is extremely important. In 2007-2008 many people were caught offside because the market lost 50% of its value, and some of those people were 1-2 years away from retirement. To help ensure that doesn’t happen, spending some time to test your portfolio will help you evaluate your risk and get out of positions that are too risky, or not risky enough, based on how much longer you plan to work.