As you enter your neighborhood, your cell phone rings and you reach down to pick it up.  It’s one of your friends who will be at your home tonight.

The radio is a little loud and you can’t quite hear your friend very well, so, while talking and driving, you reach down to turn off your radio.

At that very same instant, some neighborhood children are playing soccer in their yard.  As your car approaches, the ball rolls out into the middle of the street where you’re driving and one of the kids chases after it forgetting to look both ways to see if a car is coming.

In the corner of your eye, you see him run out from behind that parked car, so you instinctively jam on your brakes.

But, it’s too late.  You hear the sound you prayed you’d never hear, and he’s now lying on the ground motionless in front of your car.

As the paramedics arrive, the good news is the boy is still breathing.

The bad news is that he’s not moving as they struggle to keep his body still and place him on the stretcher.

After what seems like an eternity, he’s taken in the ambulance to the hospital and you are left there to talk with the police about what just happened.

Two detectives are snapping pictures of the car and measuring your skid marks in the street.

One Month Later…

A month has now passed.  The shock of what happened has not gone away, but it has come into perspective.

The boy is still in the hospital, but will be coming home soon.  Several bones in his body were broken, and after 3 separate surgeries, the doctors are confident that he’ll be able to walk just fine after a good 6 months of physical therapy.

However, the permanent damage done to his right leg will probably prevent him from playing competitive sports for the rest of his life.

What Does This Mean For You?

As if dealing with the emotional torment of accidentally hurting a young boy wasn’t enough, now comes the worst part.  The police reports come back concluding that you were driving 36 miles an hour in a 30 mile an hour zone.  And, because of that, you’re considered to be 100% at fault for negligence.

You didn’t mean to hit the child.  You’re a careful driver.  You’ve never had an accident in your life.  Your driving record proves it.

But, all of that doesn’t matter right now because unfortunately, you’re going to be at the wrong end of a very expensive lawsuit.  You can expect that within a few weeks, you will be summoned by an aggressive attorney requesting, among other things, a listing of all your income and assets.

And, the only form of compensation the attorney will get from the case will be from receiving a percentage of the damages collected from you.

And, it probably won’t be a small number.

Where Will This Money Come From?

The question for you is where will this money come from to pay for you to hire an attorney and to pay the eventual damages that will be brought against you?

It’s taken 40 years to build up enough money for you to be able to retire.  You’ve given up so much in order to save for your future.

And, now, you’re finally reaping the rewards of your lifetime of hard work and disciplined savings.  You’re retired and enjoying life like never before.

But now, everything you’ve worked your entire lifetime to save could be taken from you in an instant.

The “Strategy”

This is a horrible story that I hope never happens to you.  But, as you can see, it can happen to anybody, so I’m telling it to you to motivate you to protect yourself.

The strategy and solution in most circumstances is to have the highest liability limits on your auto insurance possible.  But, even more importantly, because potential damages could easily exceed the limits on your auto insurance, is to have a separate Personal Catastrophe Insurance Policy, otherwise known as an “Umbrella” Policy.

In most cases, if you have a quality policy with a quality insurance company, the combination of these 2 policies can protect you from the financial devastation of this horrible occurrence.

It won’t help in dealing with the emotional toll of injuring someone, but it can save you from the financial fallout, and preserve what you’ve taken your entire lifetime to accumulate.

And, the good news is that it’s inexpensive.  Each million dollars of umbrella liability coverage costs only about $200 per year.

That’s a small price to pay for the peace of mind it can provide for you in case this ever happened to you.

Visit with your property and casualty insurance agent today and coordinate your homeowners, auto, and umbrella liability insurance.  Discuss precisely what each policy covers and what it doesn’t.

This may take only 30 minutes but it could turn out to be the most important 30 minutes you’ve ever spent on your finances.

You’ve determined just how dependent you are on your Retirement Bucket™. And, you’ve forecasted out how dependent you are each year going forward (at least the next ten years).

You’ve determined the investment rate of return you must earn in order to have your Retirement Bucket™ remain intact for the rest of your life, despite your withdrawals and inflation.

You’ve begun to tackle the 3^rd question which is where do you position your investments to produce the long term rate of return you need to earn while experiencing less volatility and paying less taxes to the government?

• You’ve bought into Principle and Guideline #1 which is knowing what NOT to invest, i.e. the amount you will be spending in the short run, and you’re comfortable with the idea that not all of your money will be invested to earn top returns.

• You’re in tune with Principle and Guideline #2 which is the understanding that all investments have merit for somebody, but not necessarily for you.  Given the rate of return you need to earn due to your unique circumstances and priorities, what percentage of your investment holdings do you need to subject to different asset classes and investment styles (“trains”)?

• And, you’re comfortable with Principle and Guideline #3 which is to withdraw the income you need each month and year from the money market funds you’ve set aside, NOT by selling long term investments.  This provides you with the confidence to invest in inflation fighting investments knowing that your income needs are already being met.

Assuming you now have your Retirement Bucket™ holdings allocated exactly the way you need, Principle and Guideline #4 calls for you to assess your holdings on a strict timetable, and OBJECTIVELY rebalance.

‘OBJECTIVE’ vs. ‘Subjective’ Evaluation

In the last sentence, I capitalized the word OBJECTIVELY for a reason.  And, the reason is that we have to remove our subjective emotions when investing.

We can’t leave it up to how we feel on a given day.

For example, if June 1, 2012 was your pre-scheduled day to objectively rebalance your Retirement Bucket™, how committed would you have been if you subjectively evaluated everything vs. objectively?

In case you don’t remember, the price of the S&P 500 Index fell more than 9% from March 31, 2012 to June 1, 2012.

Over 9% in just 2 months!  And, we’re not even mentioning foreign markets which were even worse.

Subjectively, you’d say “no way”.  “Not only do I not want to rebalance back into equities, I want to get out of them completely!”

However, objectively you’d conclude that it was an incredibly opportune time (as it has certainly proven to be).

Let me give you a basic example of what I mean:

To keep it very simple, let’s assume that you’ve followed each step in The Relaxing Retirement Formula™ so far, and your carefully calculated  investment mix is to allocate 50% to fixed income and 50% to equity investments. (We don’t even need to get into specific investments yet to understand the principle.  Let’s simply stick with a basic 50%/50% allocation without factoring in whether that’s a proper allocation for you or not.)

If this was true for you, and you hadn’t rebalanced in six months or so, it’s highly likely that if you took a snapshot of your allocation June 1^st (see above), it would look more like 55% fixed income and 45% equity investments because equity prices fell so sharply.

If this was your pre-scheduled date to evaluate and rebalance (if necessary), what would be the objective action to take?

The answer is to get your allocation back to your pre-determined mix of 50%/50%, which requires you to add more money to the equity (stock based investment) side of your allocation.  Take advantage of the extraordinary timing to buy low.

In essence, what are you doing here?  You’re buying “low” vs. buying “high”, exactly what an intelligent, objective investor would do.

Fast Forward to February 28, 2013

If you then fast forward to February 28, 2013, you would find that the price of the S&P 500 Index climbed back up about 19% since June 1, 2012.

Given this, had you rebalanced back on June 1^st, it’s highly likely that your pre-determined allocation was now way out of balance the other way, i.e. 45% fixed income and 55% equity because equity prices rose sharply since you rebalanced.

If February 28^th was your pre-scheduled date to evaluate and rebalance (if necessary), what action should you objectively take?

The answer, exactly like it was before in the opposite circumstance, is to get your allocation back to your pre-determined mix of 50%/50%, which now requires you to sell a portion of your appreciated equities.

In this case, you’re selling “high”, exactly what an intelligent, objective investor would do.

I know this is keeping it very simple, but that’s the point.

The bottom line is two-fold.  First, remain objective during good times and bad, as hard as that is during heightened market volatility.  Emotional investors never win.

And, second, successful investing in your retirement years requires a carefully thought out, disciplined “system”.  Random movement for the sake of movement is a recipe for disaster.

Criteria and Guidelines for Rebalancing

Now that we’ve outlined Principle and Guideline #4, the next step is to establish your criteria and guidelines for rebalancing.

There are many different reasons and criteria for rebalancing which we’re going to explore and expand on next.

Stay tuned.

Does it even ring a bell?  If it doesn’t, that will be very meaningful sign for you in a moment.

March 9, 2009 marks the day that the value of the broad stock market index, the S&P 500, hit its bottom during the recent housing crisis led market “crash”.

To be specific, after the collapse of Lehman Brothers in early September, 2008, the value of the largest companies in the world (as measured by the S&P 500 Index) fell to 752 on November 20, 2008.

They proceeded to climb back to 903 to close out 2008, only to plummet again and hit bottom at 677 on March 9, 2009.

Do you remember how you felt back then?  What was splattered all over the news?

As you may recall, it wasn’t very good.  In fact, it was panic city in every major news outlet all over the world.

Did it scare you enough to get you to fold your tent and sell your carefully planned and selected investments in the great companies of the world as it did for millions of retirees across America?

If it did, there’s no shame as it was truly a scary time.

However, it’s extremely unfortunate for you because of the long term consequences.

The reason I say that is if you fast forward four years to March 8, 2013, the value of the same S&P 500 Index stood at 1,544!

That represents a price increase of over 128% over that four year span.  And, this doesn’t include the dividends you would have received for maintaining ownership during those years which represented approximately 2% more in return per year.

Now, this is not about rubbing salt into wounds or about saying “I told you so”.

There’s a lesson and a very important strategy involved that is critical to you experiencing the relaxing retirement you desire and deserve.

The key lesson and strategy is that if (and only if) you’ve done your homework and prepared properly, then you have the structure in place to weather a storm like on March 9, 2009, and maintain your financial confidence, i.e. confidently spend and invest.

Now, what does it mean to have “done your homework and prepared properly”?  What this means is:

1. you’ve determined the amount of money you need to withdraw from your Retirement Bucket™ each year,
2. you’ve calculated the investment rate of return you need to earn to produce the lifestyle sustaining income you need to withdraw without running out of money,
3. you’ve set aside funds in short term instruments to satisfy your withdrawal needs for several years,
4. you’ve carefully selected ‘which’ accounts you’re going to draw from so you pay the least amount of income taxes you’re legally obligated to pay,
5. you’ve strategically allocated and diversified your long term holdings among several different asset classes and investment styles with full knowledge that they will each perform differently during various market conditions over your lifetime,
6. you’ve strategically planned ‘where’ you’re going to hold your various investment holdings to take advantage of lower capital gains tax rates vs. higher ordinary income tax rates, and
7. you assess the allocation and value of your holdings on a strict timetable and objectively rebalance with the full understanding that market price corrections have always been and will continue to be a normal and regular occurrence in your investment lifetime.

If you follow and adhere to this Relaxing Retirement Formula™, then the ugly events of March 9, 2009 are a short term annoyance, but not something that causes you to abandon and dismantle your ownership of what you’ve carefully planned to provide the lifestyle sustaining income you need for the rest of your life.

You simply go to step 7 (above) and take advantage of the opportunity to own more inflation fighting investments at bargain prices.

Every January, each of these magazines ranks the highest returning funds in various asset categories over the prior year.

Celebrations begin at the companies on the top of the list because they know what’s next.

What’s next is a drastic increase in the amount of money that will now pour into their respective fund.

Why?

Because thousands of people will see their company’s fund featured at the top of the one year performance list in Money magazine.

They’ll take a look at the 2012 investment returns for that fund, compare that return to their own personal investments, and begin to fantasize about what it would have been like if they had ALL their money in that fund last year.

The overwhelming majority of them will then conclude that they need to have their money in that fund too so they don’t “miss the boat” in 2013.

Sound at all familiar?

This is one of the main reasons why the overwhelming majority of investors continue to have horrible investment experiences and remain financially DEPENDENT during their retirement years.

2012 Dalbar Study

Dalbar, a Boston research firm, conducts an annual study of average returns.  Their 2012 study spans the 20 year period from 1992 through 2011.

Here’s what their most current study reveals:

• 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 investment, but an investor, i.e. a person) over the same 20 year period was 3.49%

Take a moment to stop and re-read those two numbers for a moment and let them sink in.

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 investor (a person, not an investment) only achieved 3.49%!

That means that the average equity investor’s return was 55.3% less than the broad market index each and every year!

Assuming for a moment that you had $1,000,000 back in 1992, it’s the difference between you ending up with $4,173,706 vs. $1,918,975!  A difference of $2,254,731!

$2,254,731!

How can that be?

Well, I’ve just given you one big example: rushing to last year’s winner believing that whatever just “did” well will continue to “do” well in the future.

Dangerous!

If you’ve been reading all of my recent Strategies of the Week and you’ve been digesting The Relaxing Retirement Formula™, you know just how dangerous this behavior is at this critical stage in your life.

I’m going to assume for a moment that you’ve been reading right along and you’re in agreement with me on this.  And, that you’ve followed the formula to arrive at the investment rate of return that you now “need” to earn in your retirement years (as opposed to the rate of return you might “like” to earn).

Now that you’re here, the next question is where do you position your investments to produce that long term rate of return that you need while experiencing less volatility and paying less taxes to the government?

To help you determine the correct answer for yourself, there are FOUR principles and guidelines I’d recommend for you.

Today, I’d like to begin with Principle and Guideline #1:

How Much and When?

Investing properly in your retirement years begins with first knowing what NOT to invest.

This may sound rather odd, but think about it.

Because you will be withdrawing money from your Retirement Bucket™ each month or year, you can’t afford to have those funds subject to any market volatility.

Why take the risk when you don’t have the time to recover?

Investing is about exposing your money to capital markets with the goal of ending up with more than you exposed so you maintain your purchasing power.

However, in order to do that, it’s quite possible that capital markets may not respond the way you want in the short run and prices may temporarily fall.

If they fall right before you need to withdraw funds to live on, you’ve just suffered investing sin: you’ve sold LOW!

Or, stated more accurately: you’ve put yourself in a position where you were forced to “sell low”.

So, as I’ve stated emphatically over the last few weeks, the first principle I recommend is getting crystal clear on the amount of money you need to withdraw from your investments and “when” you’re going to need to withdraw it.

Those funds will then be strategically positioned in interest bearing instruments completely free of stock or bond market volatility.

Psychologically, this is difficult for some people to do who have never been in a position of “living” on the money they’ve accumulated.

They feel as though they need to squeeze out every ounce of return they can on every dollar they have.

That’s admirable for some, but extremely dangerous in your retirement years.

As difficult as it may seem at first, it’s critical that you get comfortable with the fact that not every dollar you own will be invested earning “market” rates of return.

Instead, you’re going to have different pockets of money that all have different goals, and thus different investment vehicles in order to support them.

You’re not going to ask every investment to get on the high speed express train.

Next week, let’s move on to Principle and Guideline #2 which is critical to your success.

To refresh our memories, let’s quickly review the Lesson of 2012 Questions:

At various points in time during 2012, it was widely reported that any one or all of the following were at crisis levels that could lead to a market crash and threaten your long term financial security if you didn’t react appropriately:

• the fiscal cliff,
• the election,
• Greece,
• Spain,
• terrorism,
• subprime derivatives,
• the deficit,
• war,
• the national debt,
• high speed computerized trading,
• unemployment,
• the Eurozone,
• etc., etc., etc.

Q1. As we stand here today in the beginning of 2013, did any of them significantly derail your long term financial plans?

Q2. If they did, why did they?

Q3. If they didn’t, why didn’t they?

Living with Uncertainty

Each of these issues is an example of “Uncertainties” that we are all confronted with on a daily basis.  And, the mass media does a brilliant job of pushing the panic button on every one of them in order to garner our undivided attention.

This will never change and there is no way to control what they throw at us each day.

However, what we can and must control is our emotional response to them.

The future, by its very nature, is filled with uncertainty.  There’s just no way of getting around that fact.

However, living and functioning with uncertainty is the dominant prerequisite to successful investing.  And, it’s the difference between those who allowed these ‘crisis issues’ to derail them vs. those who remained rational and calm.

Why?

As retirees who don’t have huge fixed monthly pensions to comfortably support us for the rest of our lives, we need capital markets to help us maintain our lifestyle in spite of rising costs.

What this means is that earning a carefully calculated investment rate of return is not something that would be “nice” to do.  It’s an absolute MUST in order to have our assets produce lifestyle sustaining income.

Forgetting Current and Historical Facts

Going back to our three questions, if any or all of the reported “crisis issues” derailed your long term plans, it’s because you allowed what was reported on that given day to outweigh current and long term historical facts.

For example, a few current facts:

• corporate earnings and cash flows continue to be at all time highs,
• companies’ cash positions, as a percentage of total corporate assets, are currently the highest they’ve been since the 1950s,
• corporate dividends, after being cut during the 2008-2009 crisis, have now resumed their historical pace and have compounded around 5.5% since 1935 while the CPI (consumer price index) has risen 3% over the same time frame.

Looking back a bit, here’s small sampling of a few others:

• the average intra-year decline in stock market prices is 14% (i.e. it’s “normal” for prices to move a bunch during any given year just as they did in 2012),
• the stock market has declined close to 30% on average every five years,
• in spite of those two facts, the price of the S&P 500 market index has risen 79 times in value since 1946 (i.e. over 66 years which happens to be the age of most of our members when they join our program),
  • note that this price increase does not include dividends reinvested.

I fully recognize how difficult it is to read and hear what appears to be devastating news on a regular basis.  And, how difficult it is to put these ‘events’ in historical perspective, thus allowing you to remain disciplined and rational.

With that said, it’s imperative that you adhere to a system of evaluating current events and what they mean to YOU in order to maintain proper perspective.

If you don’t, you’re at the mercy of anyone and everyone who shouts the loudest on any given day.

This is the reason why we designed The Relaxing Retirement Coaching Program™ which was carefully crafted to empower you to make intelligent, rational, long term planning decisions in all market conditions.

Next week, we’ll be discussing each step in The Relaxing Retirement Formula™ so you can maintain the confidence you deserve to live exactly the way you want no matter what is reported today!

Everywhere from Europe, Africa, Asia, and Australia…. to Alaskan or Caribbean cruises…. to long “escape from winter in New England time” in Florida, California, South Carolina, and Arizona.

You’ve reached the point in your life where you’ve earned the right to “own” your schedule instead of your schedule owning you like the overwhelming majority of Americans.

What a great position to be in!

However, during my intimate conversations with all of you over all these years, I also know that a number of members choose not to travel.

For very legitimate reasons, they’re just not comfortable being far away from their doctor and the medical care that they’ve become accustomed to and come to rely on.

Given the medical issues many of them have endured, I don’t blame them.

What would happen if they needed immediate care in the middle of a trip to Tuscany?

Up until recently, I would have no answer.

However, now I believe I do.

During one of our meetings, long time Relaxing Retirement members and close friends, Jack and Estelle Hayman introduced me to a service that I was completely unaware of called MedjetAssist.

Before I explain what it is, I must disclose that I am not being paid to sell or endorse this service, nor have I personally used it yet. However, several other members have reported back to me that they use the same service so I want to share it with you.

MedJetAssist

Here’s what their service provides (directly from their website) for a small annual fee ranging from $260 to $385 per year:

• MedjetAssist is a membership program, not a health insurance plan or travel insurance plan. Unlike the competition, MedjetAssist arranges medical evacuation and repatriation services for its members, both worldwide and domestically. Our members choose if they want to continue their hospital care at their home hospital, or any other hospital of their choice, through our network of authorized affiliates. And there are no additional costs to worry about and no limits on total medical evacuation expenses.

• MedjetAssist members are transferred without regard to medical necessity. This means members, as long as they are hospitalized as an inpatient, can choose to be transferred to another hospital, even if the facility they are in is considered adequate. The choice is theirs. It’s that simple!
  • In contrast, health and travel insurance plans and platinum card benefits require that a transfer be medically required. In other words, as long as the care at a hospital is deemed adequate, transferring to another hospital is not an option.
• MedjetAssist arranges medical evacuation and repatriation services to the member’s home hospital or hospital of their choice. The competition generally restricts transports to the nearest hospital that provides “appropriate care.” This means individuals are taken to a hospital the shortest distance away that has adequate care, but not necessarily the best care.
  • MedjetAssist members, if hospitalized, do not have to worry about being transferred to a nearby hospital in a foreign country that has only adequate medical care. Members choose if they want to fly home to their local hospital or hospital of their choice to receive the very best care and to be near their family.
• MedjetAssist has no limit on the cost of a medical transfer. Many companies and insurance plans place caps, some as low as $25,000, on the total amount available for an air-ambulance. But a medical transfer between Europe and America can run more than $70,000. Middle East and South American flights range from $60,000 to $100,000. Transfer from Asia often exceeds $130,000.

• If a MedjetAssist Elite or Plus member is hospitalized in their hometown hospital and requires the services that only a specialty hospital (center of excellence) can provide, MedjetAssist will arrange medical transfer for that member to the specialty hospital, provided it is more than 150 miles from the member’s home hospital.

A few key things to highlight. First, you only have to be 150 miles away from your chosen medical facility to take advantage of this. So, even if you’re seeing a play in New York City and you only want to be cared for by your doctor at Mass General here in Boston, this service would take care of that.

Second, you choose where you want your care. If the surgical specialist you seek is located at a hospital in California, and you are not well enough to fly on a commercial flight, this service takes you there.

I strongly recommend that you visit and study their website:

www.MedjetAssist.com

I hope this is a great solution for you!

• Required Minimum Distribution (RMD): If you’re age 70 ½ or older, you must start taking your RMD. Remember, the amount you must withdraw in calendar year 2012 is based on the combined value of all your qualified retirement plans as of December 31, 2011 (IRAs, SEPs, 401(k)s of ex-employers, etc.).
• Capital Gains and Losses: Capital gains tax rates are going up for most in 2013. Even without a resolution on the looming “fiscal cliff” budget deal, the 3.8% surtax on investment income and capital gains associated with Obamacare will be in effect beginning in 2013.

Given this, and the likelihood that capital gains tax rates will increase in general, you want to take a very close look at your unrealized capital gain or loss positioning in your Non-IRA accounts right now.

Additionally, go back to Schedule D on your 2011 return and verify if you have any capital losses that you may have carried forward to 2012.

Armed with this all of this information, you can make a fast, educated decision once a budget and capital gains tax rates are agreed upon for 2013.

See an upcoming article for specific recommendations no matter what Congress and the President do.

• Negative Income: Take a close look at your 2011 income tax return. Make sure that your “taxable” income on page 2 of your 1040 is a positive number. And, if you have tax credits from Boston Capital or WNC, that number should be substantial so you can use your credits.

As you’ve heard me mention numerous times in the past, I see this way too often, i.e. itemized deductions and personal exemptions that are higher than your taxable income. What this indicates is that you have the opportunity to receive more taxable income and still pay no federal income taxes.

Where? Withdraw more taxable funds from your IRA that otherwise would have been taxable.

• Roth IRA Conversion: Explore converting some (or possibly all) of your IRA to a Roth IRA, especially if you have “negative” income (see previous bullet). It gives you an opportunity to convert some or all of your IRA to a Roth with no federal income tax consequences. And, allow your money to continue to grow tax free for the rest of your life!
• Retirement Plans at Work: If you’re still earning money from work, make sure you maximize contributions to your 401(k), 403(b), or 457 MA Deferred Compensation Plans if employed, or your Sep, Simple, Defined Benefit Plan, IRA, and/or Roth IRA if self employed. Every dollar you contribute comes off your taxable income column on your tax return.
• Prescription Drug Plan: Open enrollment for Medicare Part D and Medicare Advantage is November 15th through December 31st. Don’t miss this opportunity to shop plans to best suit your health needs and your wallet.
• Your Spending: So that you can continue to spend your money with confidence, take a look at what you spent in 2012 vs. what you predicted you’d spend. Is it more? Is it less?

Remember, your goal is NOT to restrict your spending or to “budget”. It’s simply to “account” for what you’ve spent and be confident with your numbers.

If I had to spell out one commonality amongst my most successful Relaxing Retirement Members, it’s that they all know their numbers and they can tell you exactly where they are.

The reason they’re so financially confident, and in turn successful, is that they’re in control of their finances vs. the masses who are completely out of control and in constant reaction each day.

They’re not locked up in a room studying investments and tax laws all day. Quite the opposite!

They’re actually the ones who travel the most and have the most fun without being concerned about money. And, the reason they’re not concerned is they have a clear handle on what it costs for them to live exactly the way they want.

If you have any questions as to where you personally stand in relation to any of these, please don’t hesitate to call me. I look forward to helping you.

Today, I’d like to reveal a major contributor to these awful results, the ‘the double edged sword”, so we can begin to get to the root of the problem and help you confidently spend what you’ve taken your entire life to accumulate, without the constant fear that you’re going to run out!

Before we do that, however, let’s quickly refresh our memories of what the Dalbar Report revealed:

• 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, as we discussed, 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 an 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!

Not exactly very encouraging news!

The Effect

There are many, many reasons why social security statistics continue to demonstrate that only 6% of Americans are financially independent at retirement age, and can continue their same standard of living throughout their retirement years.

This Dalbar report illustrates a huge one!

On the flip side, however, the wonderful news out of all of this for you is that it’s completely within your control to close this performance gap.

This ugly performance gap is not the result of bad investments or bad markets.

It’s the direct result of poor investor strategy and behavior (action or inaction), all of which you have the ability to control!

Enjoying the relaxing retirement that you’ve worked so hard for and deserve requires not only action on your part, but resisting the allure of the wrong actions taken by the overwhelming majority of retirees.

Side #1 of the Double Edged Sword: Euphoria

What exactly is Euphoria, and why is it a problem when investing?

Well, it’s the financial equivalent of “rapture of the deep”, a phenomenon which overtakes scuba divers when they dive down really deep.

Divers get completely blissed out and they lose any adult sense of danger.

The same thing occurs with investment Euphoria.

When you’re in The Euphoria Zone, there’s a complete lack of acknowledgement of the idea that loss is even a possibility.

The best way to identify this in anyone, including yourself, is when their identification of loss, or their definition of risk, is being “outperformed” by somebody else!

They completely lose sight of their objectives and their plans and, instead, are attracted to the bright, shiny object of someone hitting a temporary investment home run.

When all you’re worried about is somebody making more money than you are, you’re in The Euphoria Zone.

What they lose sight of completely is the fact that in order to achieve higher and higher rates of return, they must take on greater and greater amount of principle risk.

1997 to 1999: The “New” Economy

The classic example of this was from 1997 through 1999 when people bought internet stocks at price multiples of 75 to 1!

Even those who were earning good rates of return doing what they were already doing. But, that didn’t matter because others were earning more so they jumped into the pond without a second thought about the potential ramifications.

2005: Real Estate

Another example of this was real estate in 2005. There was no price that was too high to pay for a pre-developed condo in Boca Raton or Naples, Florida because they just knew it would double in price in 3 years!

In hindsight, we now know what the result of this is. Condos in those towns are now selling for 25 to 40 cents on the dollar. I have a friend who bought a condo in Naples for $429,000 that he can’t sell today for $129,000!

What essentially occurs in The Euphoria Zone is the complete loss of any sense of risk at all. None.

And, that’s one of the biggest mistakes that leads to irrational investing and the horrific results revealed in the Dalbar Report.

Side #2 of the Double Edged Sword: Panic

Interestingly, there’s another more common behavior which leads to the same horrific investment results, but it stems from the complete opposite end of the Double Edged Sword…and that’s PANIC!

Retirement Investor Panic can be measured the same way as Euphoria, except in the opposite direction.

When you’re in the Panic phase, there is a complete sense that there is no price at which you can intelligently sell because it will always be lower tomorrow…and then lower again the next day after that.

You’ve watched the news. You’ve read all the articles. They’re “all” saying it so it must be true: “This time is different! The market will never come back. And, if it does, it won’t come back in your lifetime!”

So, the only solution is to get out.

Sound familiar?

When you’ve reached this point, you’re in the Panic Phase and history has proven that it’s extremely destructive.

At each great market bottom over the last 65 years, including the one we experienced in March, 2009, and the mini-corrections we’ve experienced over the last two years in the middle of each year, the exact same headlines existed in newspapers:

“This Time Is Different”

Those four words may be the most destructive collection of words for any investor.

The reality is that it’s always different…..yet the same. The problem is that when we’re in the middle of the “fire”, it’s challenging to remain calm and rational and think long term.

In the short term, it always appears to be a completely unique period of time. And, the mass media does a great job of selling that.

However, if you study history, what you’ll find is that what contributed to most market bottoms was the same factor.

How to Think About This

What I want you to know is that I’m not suggesting that you should just blissfully invest and pay no attention to anything.

I’m also not suggesting that you don’t have a right to feel anxious at times.

What I am suggesting is twofold:

1. First, this all pre-supposes that you’ve taken the time to carefully craft a Retirement Blueprint™ which takes into account every aspect of your financial life.

That you’ve carefully projected out all of your fixed income sources into the future, i.e. pensions and social security.

You’ve carefully calculated your spending priorities for both fixed and discretionary expenses into the future.

You’ve forecasted out and determined the investment rate of return that you need to earn in order for your investments remain intact for the remainder of your life (adjusting for annual inflation).

And, that you’ve properly allocated and diversified your investments among several investment styles and sizes that collectively have the realistic potential to deliver the investment rate of return you need to earn.

1. Second, what I am suggesting in today’s Retirement Coach Strategy of the Week is that the difference between getting market returns and the returns earned by the overwhelming majority of retirees over the last twenty years, which were 55% less than market index returns, is NOT due to the market.

If it was due to the market, everyone would earn what markets have produced which are extraordinary long term returns. But, the average retiree earned 55% less than the stock market index over the last 20 years.

So, the question you have to ask yourself is WHY.

And, the answer is it’s due to investor behavior. In other words, what retirees do as opposed to how markets perform, which is 100% in your control.

That’s the good news. Each of these is completely in our control. What a phenomenal opportunity we all have.

Their findings are extremely important, and there’s a lot we can learn from them, so I wanted to share them with you today.

Unfortunately, the results revealed in the newest 2012 version continue to illustrate a very disturbing reality.

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%.

If you add that up, you’ll note that the difference between what the broad market provided and the average investor earned was 7.85% in one year.

Beginning with a nice round number of $1 million of investments, the difference is a shortfall of $78,500!

20 Years: 1992 – 2011

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%

The difference is 4.32% each and every year for 20 years!

In short, the average investor earned less than half what markets provided!

What an incredibly sad statistic.

The big question is WHY? If markets provided 7.81%, you’d think the average investor would at least earn that.

But, sadly, they didn’t. And, the reason they didn’t is because of something they “did” or “didn’t do” to mess up a perfectly good thing! (We’re going to get to examples of those shortly).

What you can’t help but take away from the DALBAR Report is that, while it makes all the news, markets (or bad investments) are not our biggest problem.

The BIGGEST problem is investor behavior, which is driven by their “strategy”, or in most cases, their default strategy which is emotion based.

Forget for a moment about trying to “beat the market” which is what everybody talks about, and talk shows are built on.

The average equity investor earned 55% less each and every year than the S&P 500 market index (a market barometer of “average” returns, not above average!)

Think about that for a moment. Something that we can all control is what our biggest problem is.

It’s uncomfortable, but it’s the only logical and rational conclusion we can reach given the findings in this DALBAR report. What else could possibly explain the massive difference in real life returns that people receive?

So, our job together is to first determine what everyone is doing wrong so we don’t fall down the same path they do.

In upcoming blog entries and articles, we’re going to closely examine what those mistakes are and outline exactly how to correct them.

Stay tuned.

On October 19, 1987, market prices fell almost 25%. Yes, you read that correctly. 25%!

Imagine, at the end of one random day, a quarter of your equity holdings are gone.

How vividly can you recall that day? Do you remember the network news channels reporting it and how grim it was?

At the time, it seemed to most that it was the end of the world…or, at least, the end of our financial system as we knew it. Imagine today’s sensationalistic media outlets getting a hold of that day’s events!

Interestingly, however, something completely unexplainable has taken place since that infamous day. The world didn’t end and the financial system didn’t collapse.

Not only did it not collapse, but it has grown to unfathomable heights.

To be specific, on that dreaded day, the S&P 500 Index closed just under 225.
At the end of September, 2012, just shy of 25 years later, the S&P 500 closed at 1,441.

Do the math for a minute and you’ll discover that the value of the 500 largest companies in the United States increased six and a half times since then. And, this does not include dividends paid each year which averaged over 2% per year.

So, why are we drudging up the awful events of a single day 25 years ago? Well, as in all forms of adversity, there’s a lesson which will serve us better in the future.

Warren Buffet

As reported in Roger Lowenstein’s biography: Buffett: The Making of an American Capitalist, the value of Warren Buffett’s holdings in Berkshire Hathaway dropped $347 million on that one single day.

Not a very good day. Not even for Warren.

Given that fact, here’s an important trivia question for you: How much did Warren Buffett lose in the stock market on October 19, 1987?

Take a minute to think it over because your answer is very important to your future.

Okay, if your answer is that he obviously lost $347 million, you’re wrong. The correct answer is he didn’t lose anything because he did not panic and sell.

As we all did, Warren experienced a temporary decline in the value of his investments.

However, if all he did was receive index returns on his money since that day (which we know he earned a lot more), then his investment net worth would be six and a half times greater today. Six and a half times greater in 25 years!

Again, this doesn’t even include reinvested dividends. Let’s just assume that he spent them each year to live on!

How Can We Benefit From This?

So, what can we learn from drudging up this ugly day’s events 25 years ago?

1. First, recognize that whatever is going on in any given day, while it may feel entirely unique based on the way it’s reported on the news, just as it did back on October 19, 1987, isn’t really that unique from an historical perspective. Chances are great that we’ve been through it before, and you’ve survived its impact.
2. Second, the stock market has always been “volatile” and it will continue to be “volatile”. But, volatility is not the same as loss. I can’t overemphasize just how important that reality is. It’s simply a temporary change in price, and a reality imbedded in investing that all confident and successful retirees have to come to grips with. All major price declines have historically been temporary. Not some. All of them.
3. Investing takes real discipline. It’s not good “timing” that is the key to investing. It’s the duration of time that you maintain ownership that matters. Resiliency is typically rewarded, as it was if you didn’t jump out back in October, 1987.
4. You can’t even begin to think about owning investments at this “retirement stage” in your life before taking the time to carefully craft and develop a well thought out long term plan (Retirement Blueprint™) based on your own unique set of priorities and resources. Without it, any significant market volatility is likely to throw you into a tailspin and take you off of the disciplined path that is necessary for investment success at this stage in your life.
5. Lastly, remain disciplined in spite of daily market movements. Once you’ve taken the preceding four steps, then your job is to “objectively” monitor your results and rebalance to your prescribed mix on a regular basis without emotion.

Let’s hope we don’t have to live through another day like October 19, 1987. But, if we do, this time around, you’ll be a lot better prepared if you follow these strategies and remember that “this time it’s NOT different”.