Reason #1: The Wrong Governing Issue
Last week, I shared the story of Dennis and Shirley and the good and bad news I had to share with them.
The good news of them having enough financial resources to comfortably retire right now was, unfortunately, overshadowed by the bad news.
And, that bad news as that if they continued to invest the same way they had, their financial resources would run out in less than ten years.
Now, that may seem like a contradiction, but it’s not.
They do have the resources, but their Retirement Resource Forecasters™ that we use, as part of their Retirement Blueprint™, had some assumptions built into them.
One of them was their investments had to earn 1.5% above the rate of inflation. Historically, this has been accomplished without taking huge risks and subjecting yourself to massive volatility. Long term inflation and market performance statistics spell that out clearly.
However, given Dennis and Shirley’s actions (as illustrated in their last three years of investment statements that they brought in when we first met last month), it’s extremely unlikely that they’ll be able to accomplish this.
The reason I had to reveal this piece of bad news with Dennis and Shirley was the Dalbar, Inc. research that I shared with you last week.
To refresh your memory, here’s what their study on the results for the 20 year period ending in December, 2008 revealed
- The average annual return of the S&P 500 Stock Market Index over that 20 year period was 8.25% (including dividends reinvested). So, if you did nothing other than invest in the S&P 500 Index, you would have averaged 8.25% per year minus the cost of the index fund.
- However, according to Dalbar, Inc., the average annual return of the “average” equity mutual fund investor (not investment, but investor, i.e. a person) over the same 20 year period was 1.87%
- The average annual return of the Barclays Bond Market Index: 7.43%
- Yet, the Average annual return of the “average” bond fund investor was (.77%) (So that we’re clear, that’s 77/100ths of 1%!)
What these numbers tell us is that, while the S&P 500 Market Index delivered an average annual return over those 20 years of 8.25%, the average stock mutual fund investor (a person, not an investment) only achieved 1.87%, or approximately 77% less (each year) than he or she would have earned sitting in a rocking chair staring out the window!
Unfortunately, it’s no better with bond investors. The average bond fund investor earned approximately 90% less (each year) than he or she could have earned doing nothing but buying an index fund and watching from the sidelines.
How incredible is that?
What Can We Learn From This?
What you can’t help but take away from those statistics is that, while it makes all the news, markets or bad investments are not our biggest problem. Far from it. whois directory
The big problem is investor behavior which is driven by their “strategy” or lack thereof.
Forget for a moment about trying to “beat the market” which is what is talked about in all investment forums today.
The average stock mutual fund investor earned 77% less each and every year than the S&P 500 market index (a market barometer of “average” returns, not above average)!
In the bond category, it’s even worse. The average bond fund investor earned 90% less every year!
Think about that for a moment. Something that we all can control is what our biggest problem is.
I recognize that I’m repeating myself, but I’m doing so to emphasize this critical point.
Why and What Can We Do To Close The Gap?
There are several “behavioral mistakes” that I’ve personally witnessed over the last 21 years that I’d like to share with you.
And, these are the biggest reasons why I believe the average investor earned 77% to 90% less than the market averages.
Those that I share with you are in no particular order or strength of importance. The ramifications of any one of them could be devastating!
Let’s start today with Reason #1 why I believe this massive performance gap exists: The WRONG “GOVERNING” ISSUE.
Let me clarify what I mean by “Governing Issue” because it has many important points that I suggest you make a note of.
First, a statistic for you: the average retirement age today is age 62. If you are a 62 year old couple (and each of you does NOT smoke), mortality tables tell us that at least one of you will live to be 92!
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 life sustaining income.
Not even just twenty.
But 30 years!
The Goal: Life Sustaining Income
By “life sustaining”, I mean income that keeps your standard of living the same even when prices rise.
Let me put that into perspective for you. 30 years ago in 1980, a first class stamp was 15 cents.
Today, it costs 44 cents to send the same letter. Not a better letter, but the same letter.
Now, here’s the problem from an investment standpoint…what is the dominant governing issue among 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 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.
Stay tuned next week as we dive into Reason #2 why the average retiree earned 77% to 90% less than market averages over the last 20 years.
Committed To Your Relaxing Retirement,
The Retirement Coach
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