Your “Top 6% Club” Check-up”
As we head into the fall season, it’s a great time to do a little “Top 6% Club Check-Up” to see which club you choose to belong to.
Note that I said “choose”. I did this very intentionally because it is a choice. Your personal results are not pre-determined. Studies continue to show that your results are significantly influenced by what you do and don’t do, which is all up to you.
To begin with, let’s take a look at a nice broad barometer for stock markets, the S&P 500 Index, to see where we’ve been so far this year.
Here are the price levels on various dates this year (note the disparity in prices, sometimes referred to as “volatility” when prices are down):
- December 31, 2011: 1,258
- March 30, 2012: 1,408
- June 1, 2012: 1,278
- August 17, 2012: 1,418
Now, let’s take a look at two different couples and their “choices”…
Ron and Rose Reactionary (members of “The Bottom 94% Club” who, unfortunately, are NOT able to maintain their same lifestyle in their retirement years)
Ron and Rose have a “Timing and Selection” mindset.
They believe that in order to benefit from markets, you have to be “in” at the right times, and, by definition, you must be “out” during the wrong times. In essence, although they wouldn’t describe it this way, they subscribe to the theory of ‘market timing’.
They also believe that in order to benefit from markets, you must be on the cutting edge in selecting what’s “hot”. So, they’re constantly searching for what’s new.
Because of this, Ron and Rose pay very careful attention to the news on a daily basis. They’re very in tune with market movements, and the root causes of them as reported by the mass media.
So for example, after markets shot up in the first quarter (1.258 to 1,408), their confidence grew, so they went “all in”.
However, after markets soured in the second quarter and closed at 1,278 on June 1st, they became very uncomfortable with what they were seeing and hearing reported each day so they “got out”. They figured that it would be better to be on the sidelines until the European Debt Crisis, the Unemployment Crisis, Greece’s Solvency Crisis, and….(The “Crisis Du Jour”), etc. got resolved and things ‘settled down’. Then, they’d get back in.
Since then, the recent market climb from 1,278 back up to 1,418 brought their confidence back that “things had settled down”, so now they’re ready to “get back in the market again”.
If you closely examine Ron and Rita’s behavior, you’ll note that it’s based on day to day reaction and emotion, i.e. how they feel about what they’re seeing and hearing.
Their “system” is based on reacting on a moment by moment basis, just like what is ‘taught’ by the mainstream media who make their money selling advertising space, not by managing other people’s money.
Unfortunately, if you do the math, you’ll note that they bought at each high, and sold at the low in June.
Why? Not because they wanted to. That’s just what their reactionary system led them to do. Their underlying belief is that in order to do well in markets, you have to be in and out at the right times.
John and Mary Independent (members of “The Top 6% Club” who confidently continue their same lifestyle in their retirement years.)
John and Mary have an “Ownership” mindset.
They do their homework.
John and Mary have carefully calculated the amount of money they need to withdraw from their investments each year in retirement. (Their Retirement Bucket™)
They’ve determined the investment rate of return they need to earn to spend what they want without running out of money.
They’ve carefully allocated their investments exposing a certain percentage to equities (stock based investments, etc.), and a certain percentage to fixed income investments (bonds, money markets, etc.) to give themselves the best opportunity to achieve the rate of return they need to earn.
John and Mary have intentionally diversified their investments among several different styles of funds to expose themselves to a range of markets.
They know that these assorted styles will perform differently during various market conditions, thus diversifying themselves and reducing the overall volatility of their investments at the same time.
They’ve carefully selected seasoned fund managers and/or used targeted indexes in each of the styles of investments they need, and they consistently hold them accountable vs. their peers.
And, then, they do the most important thing of all. John and Mary Independent maintain an “ownership” mentality because they know that it’s impossible to predict when prices will rise and fall with any long term consistency.
- So, for example, on March 30th, when the S&P had shot up to 1,408 from 1,258, they didn’t get overly excited.
- Then, on June 1st, when the market had slid to 1,278, they didn’t view it as the end of the world as was widely reported and accepted. They expected prices to temporarily slide because they always do.
- And, finally, they’re not in the “Euphoria Zone” and feeling over-confident right now since prices have climbed back up to 1,418. They view it as just another day to “own” quality companies who they believe have the best chance to provide lifestyle sustaining price and dividend increases over their lifetime.
Now, this is not to suggest that John and Mary put their head in the sand and forget to pay attention to what’s going on. They simply don’t allow temporary swings in the market, and the ‘Crisis du Jour’ reported on the news, to change their approach like a politician changes his or her opinion based on the latest poll!
They set periodic dates throughout the year when they will assess their performance and rebalance their holdings to bring their investments back into their pre-prescribed balance, no matter what the market conditions are on that specific day.
Because they’ve done their homework up front, this affords John and Mary the luxury of acting in this calm manner… like a pro.
Quite a contrast!
The good news is that you have a choice:
- Would you rather be in the Top 6% Club like John and Mary Independent?
- Or, would you rather be in The Bottom 94% Club like Ron and Rose Reactionary?
Which “system” do you believe makes more sense?