I am going to take a little deviation from the normal “technical update” to discuss an issue that is very important, and always overlooked, by mainstream analysis – “duration.”

In the bond market the concept of “duration matching” is commonplace. If I have a specific target date 10-years in the future, I don’t want a portfolio of bonds maturing in 20-years.  By matching the duration of the bond portfolio to my target date, I can immunize the portfolio against increases in interest rates which would negatively affect the principal value in the future.

Unfortunately, in the equity markets, and particularly given the advice of the vast majority of mainstream analysis suggesting that all individuals should “buy and hold” indexed based investments over the long-term, this concept is disregarded.

However, it is a crucially important concept to understand and incorporate in the portfolio and risk-management process. Let me explain.

Over the years, I have done hundreds of seminars discussing how economic, fundamental and market dynamics drive future outcomes. At each one of these events, I always take a poll asking participants how long they have from today until retirement. Not surprisingly, the average is about 15 years.

The reason is obvious. For most in their 20’s and 30’s, they are simply not making enough money yet to save aggressively nor or is that a focus. During the 30’s and early 40’s, it is buying a house, raising kids, and paying for college – again, not a lot of money left over to save. For most, it is the mid-40’s and early 50’s where the realization to save and invest for retirement becomes a priority. Not surprisingly, this is the dynamic that we see across most of the country today in survey’s showing the majority of individuals VASTLY under-saved for retirement. 

Chart Courtesy Of Motley Fool

As you can see, $45,000 to fund retirement isn’t going to cut it.

Bare with me, I am getting to the point.

Let’s make a couple of assumptions. First, you don’t have 100+ years to invest in the market to get the “average”long-term returns unless you have contracted “vampirism” during your recent visit to Transylvania.