What We Can Learn By
Shutting Out the Noise
Good Morning Relaxing Retirement Subscriber,
It’s that time of year again. Time to wave goodbye to another great year together, and prepare for another one!
Before we begin our plans for the new year, let’s take a moment to look back over 2016 so we don’t miss the opportunity to learn the valuable historical lessons that were provided.
Once again, equity markets experienced significant volatility in 2016, and there were three separate episodes worthy of mention.
It all seems like a distant memory right now, but after falling over 2% in December, 2015, the broad S&P 500 index opened 2016 by falling almost 11% through February 11th.
The mainstream financial media proudly proclaimed this “cataclysmic” event as “the worst first six weeks in stock market history”!
What followed was predictable by all rational thinkers. By Spring, market prices rebounded and returned to pre-”worst first six weeks in stock market history” levels.
The second event worthy of mention was of course the Brexit vote over the Summer. The media elite led most to believe that the citizens of the UK would never leave the European Union. When the votes were counted, however, they were proven wrong and broad market prices spiraled down almost six percent in less than two days.
Again, cool and rational heads prevailed and market prices not only wiped out all Brexit losses, but established all-time highs within a few weeks.
The final event was, of course, the presidential election. You may recall that market prices climbed 2% in the days leading up to the election. However, at approximately 2:30 a.m. on the night of the election, when it appeared that Donald Trump was going to win, Dow Jones futures were down 800 points (4.35%) from the previous close.
Not only did that not hold, but by the close of the market on the day after the election, the Dow closed up 1.5%.
What Can We Learn From This?
First, manic market movements like these are extremely common historically. They are not different, thus your reaction doesn’t need to be different if you are in this for the long term (which you are). Treat them as the blips on the screen that they are despite what the financial media labels them as.
Second, you are in the ownership game, not the trading game. You are not attempting to “trade” your way to investment gains. Instead, you own pieces of thousands of growing businesses in the U.S. and throughout the world. News driven, short term price movements (up or down) are meaningless to the long term value of the companies you own.
At the end of 1935, the value of the broad market S&P 500 Index was 13. At the end of 2016, it was 2,239.
Question: Why is the stock price of those 500 companies 172 times greater than it was 81 years ago (excluding dividends)? The reason is not because of a certain president or any notable news event. The reason is because the earnings of those 500 companies grew by that much!
Stop and think about that for a moment. Over those 81 years, there was a 0.95 correlation between the earnings of those 500 companies and their respective stock prices.
Translation: the reason their stock prices are up 172 times is because their earnings are up approximately 172 times! All of the short term price movements in between due to panics, crises, presidential elections, wars, etc. were just that: temporary, and borderline irrelevant to rational, long term “owners.”
Goal vs. Market Focused
Finally, the most important lesson of all is that while markets are a vital tool we all need and use, the successful investors in retirement who I’ve witnessed over the last 28 years were relentlessly goal-focused.
The unsuccessful ones were anxiously market-focused.
There is a huge difference.
When markets move quickly, and the financial media creates more hysteria, it’s easy to lose sight of your Retirement Bucket™ goals of providing the income you need each and every year for the rest of your life.
In light of this, as we enter this new year together, it’s a great idea to reaffirm what your top three goals are for your Retirement Bucket™ during this critical phase of your life:
- First and foremost, to provide consistent short term cash flow each and every month, as well as funds for cars, vacations, and home improvements. Aside from your good health, if you don’t have the necessary cash flow to do what you want, where you want, when you want, with whomever you choose to do it with, life is not as enjoyable as it deserves to be.
We strongly believe in keeping several years’ worth of your anticipated withdrawals in cash instruments and short term bonds so that you are not in a position of having to sell your carefully allocated equity holdings when temporary market forces are not in your favor.
- Second, long term growth to generate the increased income you need each year in the future to keep pace with your rising lifestyle costs (inflation). Earning the long term, “real” investment rate of return you need to earn is not a bonus. It’s an absolute necessity if you want to maintain the lifestyle you have worked so hard for.
In stark contrast to stock picking, short term trading, and market timing, we strongly believe that your strategy for the rest of your Retirement Bucket™ be built on “capturing” the long term returns of equities. This can be accomplished by strategically diversifying among several assets classes representing thousands of value driven, profit seeking companies in the United States and all over the world.
- Finally, to be tax efficient, i.e. be strategically positioned to pay the least amount of taxes you are legally obligated to pay while still satisfying your cash flow needs and accomplishing your growth goals.
You have every right to pay the least amount of taxes that you are legally obligated to pay. It’s your money, not the government’s money. You created the value to earn it. You saved it. And, you deserve to derive all of the benefits from having done both successfully.
Staying on track with all three of these Retirement Bucket™ goals requires discipline, and a system and a structure, and that’s what our Relaxing Retirement Coaching Program was built to provide for you.
All of this is critically important to keep in the forefront of your mind when more and more financial media “noise” rears its ugly head the next time markets turn.
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! (The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)