Last week we talked about the “Common Mistakes with 401(k) Accounts.” We focused on hidden 401(k) fees, how much it could be costing you, and how you can reduce some or all of your fees. This week we’ll focus on the impact of losses in your investments.
When we listen to Wall Street and other financial institutions, they all repeat the same old stories decade after decade. Common mantras like: “buy and hold, the market always comes back” or “you haven’t lost until you sell,” and “invest as much money as you can in the stock market as soon as you can.” These are just a few examples of what you hear from the financial industry, experts who are consistently promoting the services they sell to you. Is this really the right way to invest? Let’s dive deeper into these mantras and make sure the decisions you make are best for you, not the financial industry.
I’ll begin with a simple question: Would you invest in a vehicle where your savings are subject to losses and with just a 2% annualized rate of return?
Think about that for a minute. You have the risk of potentially losing money compounded with the fact that this vehicle, over the last decade and a half, has produced an annualized return of just 2.0%. Would you put your hard earned savings into a plan that works like this? Most people I’ve talked to have replied with a resounding no. Let’s take a look.
The chart we’re looking at is a hypothetical $1 million investment in the S&P 500 Index and that investment’s performance since 2000. Now granted, not all of your money may have been in the stock market… but let’s just go with it for example purposes. In 2000, if you had a starting balance of $1 million in your portfolio, you would have taken a substantial hit due to the multi-year market decline. From 2000 to 2002, your investment dropped from $1 million to around $600,000, approximately a 40% loss. If you had the courage to stay in the market, you spent the next five years crawling back to nearly breakeven in 2007. Think about it for a minute, seven years have gone by and you haven’t made a dime in the markets.
Then the financial crisis of 2008 hit and your portfolio drops 38%, down to roughly $615,000. Again, it takes about five years to get back to our original $1 million. Another five years wasted playing catch up. Take a good look at the chart, how much have you earned from 2000 to 2008 with a “buy and hold strategy”? Nothing…
If you’ve been in the market since 2000 the profits have only been made the last couple of years. In this example, our $1.0 million beginning balance grew to $1.4 million at the end of 2014. That’s an average annual rate of return on an IRR basis of 2.0%. Is an investment return at par with long term CD rates worth the risk? Did the buy-and-hold strategy really work over this period of time? These approaches are being promoted by Wall Street, mutual fund companies and other financial institutions every day. What they may not be telling you is that every time you lose money in the markets, you create a drag on your account where your portfolio is constantly working to get back to even. As you can see, this drag can stay with you for 5, 10 plus years. Is this the best that Wall Street and other financial institutions have to offer; and more importantly, is it working for you even now? Is this really the right approach for investing or is there a better way?
The problem with “buy and hold” is that investors never hear the full title of that strategy, which may be why people don’t understand the major flaw until it’s too late when the money is gone and the years are wasted. The full title of the strategy is “Buy at Any Price in the Market and Hold with No Plan for Risk or Profit.” Does this make any sense to you? Do you think this is the strategy financial institutions use for their capital? Now I know I am not making any friends on Wall Street writing articles like this but I feel it’s my responsibility to expose the truth. Furthermore, the problem is not the big banks and financial institutions, it’s you. They aren’t doing anything wrong, the average investor is, due to a simple lack of understanding. To really change your financial trajectory, there is only one answer in my opinion: Stop thinking and acting like an average investor and start thinking and acting like the big banks and financial institutions.
I started on the financial institution side of the business and, trust me, the actions of the average investor compared to Wall Street are nearly opposite. This is why one group typically achieves record breaking profits much of the time and the other hardly ever comes close to achieving their financial goals. What if we start thinking and acting like Wall Street and other financial institutions? Let’s take the first step here and see where this leads you.
At Online Trading Academy, we’ve spent years developing a very low risk wealth building/passive income strategy. This strategy utilizes a multi-prong methodology that leverages predictable monthly income payments which are then utilized to enter directional positions in the stock market (and/or other markets). In other words, you’re able to take advantage of stock market moves without stock market risk to your principal, and no, this is not an annuity. Instead of your investment capital sitting in the stock market with all the risk and fees, why not use interest payments from very safe, short maturity, and investment grade bonds to buy options on stock market moves. This is one of the many simple and safe strategies financial institutions use for their capital. Are you? In our Financial Matters program, students are taught this simple strategy which enables them to think and invest similar to a Wall Street professional. As a result, students participate in stock market gains without exposing their savings to stock market risk.
The next time you make a key financial decision, make sure you’re asking yourself this simple question: Is this decision benefiting you, or your financial advisor? Last week we discussed fees and this week losses. Next week, in the final part of this three part series, we’ll focus on putting more money in your pocket, keeping more of what you make.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org