Problem #2

Good Morning Relaxing Retirement Member,

This edition is a little longer than most, but it’s necessary to demonstrate a very, very important point. Thank you in advance for your patience in following through to the end.

Over the last two weeks, we’ve been attempting to discover what we can do to close the horrific performance gap revealed in the 2015 DALBAR Report.

Before I outline another one of the biggest contributing factors to these devastating results, which is rampant today, let’s quickly re-examine what the 2015 DALBAR Study revealed:

  • The Average annual return of the broad market S&P 500 Index from 1996 – 2015 was 8.19% (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 4.67%

What these numbers tell us is that, while the standard barometer for broad stock market performance, otherwise known as the S&P 500 Index delivered a very respectable average annual return over those 20 years of 8.19%, the average stock mutual fund investor (a person, not an investment) only achieved 4.67%!

That means that the average stock mutual fund investor’s return was 43% less than the market barometer of “average” returns, not above average, each and every year!

As I also revealed, the news is even worse if we extend the numbers over the average 30 year retirement. While the S&P 500 Index earned an average annual return over the last 30 years of 10.35%, the average stock mutual fund investor (a person, not an investment) earned only 3.66%!

The Effect

There are many, many reasons why statistics continue to reveal that a tiny percentage of Americans are financially independent at retirement age, while the overwhelming majority of Americans are not.

This DALBAR report illustrates a huge one!

The good news out of all of this, however, is that it’s completely within our control to close this performance gap.

This ugly performance gap is not the result of bad investments or bad markets.

They are the direct result of poor investor strategy and behavior (action or inaction), all of which we have the ability to control!

Enjoying the relaxing retirement that you’ve worked so hard for and deserve requires not only action on your part, but resisting the allure of the wrong actions taken by the overwhelming majority of retirees.

Let’s examine one of them….

Side #1 of the Double Edged Sword: Euphoria

What exactly is Euphoria, and why is it a problem when investing?

Euphoria is the financial equivalent of “rapture of the deep”, a phenomenon which overtakes scuba divers when they dive down really deep. Divers get completely blissed out and they lose any adult sense of danger.

The same thing occurs with Retirement Investor Euphoria when someone completely loses sight of their objectives and their plans and, instead, is attracted to the bright, shiny object of someone hitting a temporary investment home run.

The best way to identify this in anyone, including yourself, is when their identification of loss, or their definition of risk, is being “outperformed” by somebody else!

During bull markets like we’ve experienced since 2009, this is rampant! Think of the conversations you hear in the barber shop, or the 19th hole lounge after a round of golf, or at a “power lunch”.

Can you hear them?

What they lose sight of completely is the fact that in order to achieve higher and higher rates of return, they must take on greater and greater amount of risk.

The classic example of this was from 1997 through 1999 when people bought internet stocks at price multiples of 75 to 1, even those who were earning good rates of return doing what they were already doing. But, that didn’t matter because others were earning more so they jumped into the pond without a second thought about the potential ramifications.

The Opposite End: Panic

Interestingly, the complete opposite end of the Double Edged Sword leads to the same horrific investment results, and that’s PANIC!

Retirement Investor Panic can be measured the same way as Euphoria, except in the opposite direction.

When you’re in the Panic phase, there is a complete sense that there is no price at which you can intelligently sell because it will always be lower tomorrow…and then lower again the next day after that.

You’ve watched the news. You’ve read all the articles. They’re “all” saying it so it must be true: “This time is different! The market will never come back in your lifetime!” So, the only solution is to get out.

Sound familiar?

Think about August of last year when prices dropped 11% in 3 days. Americans pulled $28.5 billion from equity funds in one week!

Or in January of this year (2016) when prices dropped right out of the gate and the financial media signaled the worst start since 1929. The exact same result happened: another $24 billion withdrawn in January alone.

At each great market bottom over the last 65 years, including the big ones we experienced in October of 1987, March of 2003, and, of course, March of 2009, and even all the standard corrections we’ve experienced over the last two years, the exact same headlines existed in newspapers:

“This Time Is Different”

Those four words may be the most destructive collection of words for any investor.

The reality is that it’s always different…..yet the same. The problem is that when we’re in the middle of the “fire”, it’s challenging to remain calm and rational and think long term.

In the short term, it always appears to be a completely unique period of time. And, the financial media does a great job of selling that.

However, if you study history, what you’ll find is that they all share one thing in common: they were all temporary!

How to Think About This

What I want you to know is that by illustrating these troubling behavioral mistakes, I’m not suggesting that you should just blissfully invest and pay no attention to anything. I’m also not suggesting that you don’t have a right to feel anxious at times.

What I am suggesting and would like you to focus on is twofold:

  • First, your ability to bypass these costly behavioral mistakes pre-supposes that you have taken the time to carefully craft a Retirement Blueprint™ which takes into account every aspect of your financial life.

  • That you have carefully projected out all of your fixed income sources into the future, i.e. pensions and social security.

  • That you have carefully calculated your spending priorities for both fixed and discretionary expenses into the future and determined your specific level of Retirement Bucket Dependency.

  • That you have forecasted out and determined the real investment rate of return that you need to earn in order for your Retirement Bucket™ to remain intact for the remainder of your life (adjusting for annual inflation).

  • And, that you’ve properly allocated and diversified your investments among several investment asset classes which collectively have the realistic potential to deliver the real investment rate of return you need to earn over your lifetime.

  • Second, what I am suggesting is that the difference between getting market returns and the returns earned by the overwhelming majority of retirees over the last twenty years, which were 43% less than market index returns, is not due to the market.

  • If it was due to the market, everyone would earn what markets have produced which are extraordinary long term returns. But, the average retiree earned 43% less than the broad stock market index over the last 20 years.

So, the question you have to ask yourself is WHY. And, the answer is that it’s due to investor behavior. In other words, what retirees do as opposed to how markets perform, which is 100% in your control.

That’s the good news. Each of these is completely in our control. What a phenomenal opportunity we all have.

Committed to Your Relaxing Retirement,

Jack Phelps

The Retirement Coach
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(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.)