Why has the average stock mutual fund investor (a person and NOT an investment) earned half of the investment returns that the stock market index has provided over the last 20 years (48.3% less to be exact)?
That’s the puzzling question we will continue to try and solve today so you can avoid the same mistakes and experience the relaxing retirement you deserve.
As you’ve discovered over the last few weeks, there are actually many reasons.
You may recall that Reason #1 was the wrong governing issue that dominates retiree’s goals which is to focus on protecting principal instead of protecting your lifestyle sustaining purchasing power.
The second “behavioral mistake” that can easily be curtailed is entering the Riskless Euphoria Zone where you lose sight of all risk. The only risk you focus on is the “risk” of earning less than your peers over a given short period of time.
The next huge problem that I’ve witnessed coaching retirees over the last 24 years is investing only for current yield vs. investing for total return.
Let me explain what I mean.
As most individuals transition over to retirement, their thought process is that they need to “create” an income to supplement social security and pensions. And, that’s correct.
Where the mistake occurs is when they believe that the only source of that income comes from fixed income investments, like bonds, money markets, CDs, or fixed annuities, etc.
Because of this, most go out and hold most of their investments in those with the highest “current” yield. Or, in other words, what pays them the most income right now.
The problem with this practice is that investments with the highest current yield, by definition, have the lowest long term total return.
And the converse is also true. Investments with the highest long term total return have the lowest “current” yield.
The market has to compensate for that lower current yield by providing a higher long term total return.
If we only judge an investment based on current yield (or the income it produces today), you’ll have all your investments in those with the lowest overall total long term rate of return.
And, you may very well need that long term total rate of return to make it all work for you (based on following The Relaxing Retirement Formula™ we’ve talked about).
This is the classic American mistake when it comes to investing in retirement.
The biggest challenge is “when” retirees find this out!
If they find out early in their retirement years, they can potentially resurrect their retirement.
However, most find out way too late. They find out when they’re 78 or 80 or 82 years of age. Their costs have doubled or tripled and their income has remained the same because they invested all their eggs in the highest current yielding investments which are fixed income investments.
The horrific result of this is they run out of money.
This is the crux of everything we’re trying to help you prepare for. It’s not that we want to earn a great rate of return just for the sake of earning a great rate of return.
We need to earn the returns we need to earn in order for us to continue the lifestyle that we’ve become accustomed to living.
It’s not a bonus. It’s a necessity.
Health insurance and health care costs, condo fees, gas for our cars, oil to heat our homes….they’re all going to increase in price each and every year. You can count on it.
The question is will your Retirement Bucket™ be able to keep pace and continue to throw off the increased lifestyle sustaining income you need and have worked so hard for?
Committed To Your Relaxing Retirement,
The Retirement Coach
P.S.WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.I appreciate the trust you place in me. Thank you!