The Underlying Problem
Earlier this month, I shared the grim and disturbing findings revealed in DALBAR’s annual report.
To refresh your memory, here’s what the report revealed for last year, i.e. 2011:
- The S&P 500 Stock Market Index earned 2.12% (including dividends reinvested) in 2011
- Over the same twelve month period, the return of the “average” investor who invested in the stock market (not an investment, but an investor, i.e. a person) was -5.73%.
However, anyone can have a bad year and this is too small of sample size, so Dalbar also presented their findings for the last 20 years ending on December 31, 2011:
- The Average annual return of the S&P 500 Stock Market Index from 1992 – 2011 was 7.81% (including dividends reinvested)
- However, the average annual return of the “average” equity investor (not an investment, but an investor, i.e. a person) over the same 20 year period was 3.49%
What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 20 years of 7.81%, the average stock fund investor (a person, not an investment) only achieved 3.49%!
That means that the average equity investor’s return was 55% less than the broad market index each and every year!
Now THAT is a sad statistic!
The Underlying Problem
There is no ONE reason or one strategy you can use to close this gap.
However, over the last 23 years, there are several “strategic behavioral mistakes” that I’ve personally witnessed that I’d like to share with you that you can instantly employ.
Today, I’d like to discuss what I refer to as “The Underlying Problem”.
First, a statistic for you that you may have heard me share with you before: the average retirement age today in America is age 62.
If you are a 62 year old couple (and each of you does NOT smoke), insurance company mortality tables tell us that at least one of you will live to be 92 years of age!
Please take a moment to go back and read that last paragraph before going on.
That means that, if you’re age 62, you’ve got 30 years with which to provide lifestyle sustaining income.
Not even just twenty.
But 30 years!
The Goal: Lifestyle Sustaining Income
By “lifestyle sustaining”, I mean income that keeps your standard of living the same even when prices rise.
Let me put that into perspective for you.
In 1932, a first class stamp cost 3 cents.
In 1971, it was 8 cents.
In 1980, it was 15 cents.
Today, it’s 44 cents and rising!
Not to send a “better” letter, or even get it there faster as you’ve recently observed, but the same letter.
While there are very few guarantees in life, one that I believe we can take to the bank is the fact that life will continue to get more and more and more expensive.
As I just illustrated, the price to mail the exact same letter costs you three times what it did just 30 years ago.
That’s extremely instructive given the 30 year lifespan of a 62 year old retiring couple.
Protecting Principal vs. Protecting Purchasing Power
Now, here’s the problem from an investment standpoint…what is the dominant underlying governing issue among the overwhelming majority of retirees?
If there’s a loss that everyone tends to focus on managing, this is it. Above all else, “we have to protect our principal.”
And, this governs their investment decisions.
Well, in reality, the biggest financial issue, as I’ve just illustrated, is the protection of your “purchasing power”, or your ability to sustain the same standard of living.
This has nothing to do with wanting “more” for yourself.
It’s about sustaining the same lifestyle.
Even if inflation is only 3% over the next 30 years, and I would strenuously caution you against using that low of a number, but even if it is only 3%, you’ll need $2.44 (2 dollars and 44 cents) to pay for the same goods and services that the dollar in your pocket pays for right now.
That means that if groceries currently cost you $100 per week, they’ll cost $244 for the exact same groceries.
Again, this is not a bonus to protect your purchasing power.
It’s a bare necessity! Yet, the overwhelming majority of retirees have as their #1 goal to protect their principal, when in fact it has to be the protection of their lifestyle sustaining income.
I can’t stress enough how important it is to clearly distinguish between those two goals if you want your hard earned money to be there for you for the rest of your life.
Next week, we’re going to continue on and discuss the second biggest contributor to horrific investment results among retirees, and what you can do about it right now.