Investment Strategy Problem #1!

Good Morning Relaxing Retirement Member,

Last week, I shared the story of Ron and Rita and the good and bad news I had to share with them.

After analyzing and crafting their custom designed Retirement Blueprint™, taking into account all of their priorities and all their resources, the good news we shared was they had enough money to make it all work!

Enough money and income to continue living the way they wanted without running out of money over their expected lifetime.

What an accomplishment!

But, before the party balloons were released we had to share some bad news with them as well.

And, that bad news as that if they continued to invest the same way they had, their financial resources would run out in 8 to 9 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 to design their Retirement Blueprint™ have some assumptions built into them, as all forecasts do.

One of those assumptions was that their investments had to earn 1.0% above the rate of inflation. Historically, this has been accomplished without significant effort. Long term inflation and market performance statistics spell that out clearly.

However, given Ron and Rita’s actions (as illustrated by their investment spreadsheets that they shared with me), it’s extremely unlikely that they’ll be able to accomplish this.

The reason I had to reveal this piece of bad news with Ron and Rita was the 2013 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, 2012 revealed.

  • The Average annual return of the S&P 500 Stock Market Index from 1993 – 2012 was 8.21% (including dividends reinvested)

  • However, over the same 20 year period, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) was 4.25%

What these numbers tell us is that, while the S&P 500 Market Index delivered a healthy average annual return over those 20 years of 8.21%, the average stock mutual fund investor (a person, not an investment) only achieved 4.25%!

That means that the average stock mutual fund investor’s return was 48.3% less than the market barometer of “average” returns, not above average, each and every year!

Stop and think about that for a moment. That means, over the last 20 years, the actual returns received by investors was HALF of what markets provided!

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.

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 everybody loves to talk about and talk shows are built on.

The average stock mutual fund investor earned 48% less each and every year than the S&P 500 market index. Again, the market barometer of “average” returns, not above average!

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.

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

  • What Can You Do To Close This Performance Gap?

    The first piece of news to share is that there is no ONE reason or one strategy you can use to close this gap.

    However, over the last 24 years, there are several “strategic behavioral mistakes” that I’ve personally witnessed that I’d like to share with you.

    And, these are the biggest reasons why I believe the average investor earned 48% less than the market averages.

    Let’s start today with Reason #1 why I believe this massive performance gap exists: The WRONG “INVESTMENT GOVERNING” ISSUE.

    Let me clarify what I mean by “Investment Governing Issue” because it has many important points that I suggest you make a note of.

    First, a statistic for you that you may have heard me share with you before: the average retirement age today in America is age 62.

    If you are a 62 year old couple (and each of you does NOT smoke), insurance company mortality tables tell us that at least one of you will live to be 92 years of age!

    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.

    30 years!

    Not five.

    Not ten.

    Not even just twenty.

    But 30 years!

    The Goal: Lifestyle Sustaining Income

    By “lifestyle sustaining” income, I mean income that keeps your standard of living the same even when prices rise.

    Let me put that into perspective for you.

    In 1932, a first class stamp cost 3 cents.

    In 1971, it was 8 cents.

    In 1980, it was 15 cents.

    Today, it’s 46 cents!

    Not to send a “better” letter, but the same letter.

    While there are very few guarantees in life, one that I believe we can prudently count on is the fact that life will continue to get more and more and more expensive.

    As I just illustrated, he price to mail the exact same letter costs you three times what it did just 30 years ago.

    That’s extremely instructive given the 30 year lifespan of a 62 year old retiring couple.

    Protecting Principal vs. Protecting Purchasing Power

    Now, here’s the problem from an investment standpoint…what is the dominant governing issue among the overwhelming majority of retirees?

    Protecting Principal!

    Whenever you hear the overwhelming majority of retirees talk about “risk”, this is what they’re focused on. Above all else, “we have to protect our principal.”

    And, this governs their investment decisions.

    Well, in reality, the biggest financial issue, as I’ve just illustrated, 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.

    I can’t stress enough how important it is to clearly distinguish between those two goals if you want your hard earned money to be there for you for the rest of your life.

    Stay tuned next week as I’ll reveal the 2nd biggest reason for the horrific performance gap of the average retiree, and what you can do about it.

    Committed To Your Relaxing Retirement,

    Jack Phelps
    The Retirement Coach

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