Let’s talk about some market truths. There’s a lot of advertising from a lot of financial firms that go into feeding you an idea that wealth is generated in this country by investing in the stock market.
That can be true, but I have bad news for you – it’s often not true. Now I can see your cheeks redden and I can feel the defensiveness that’s building up within you but let me explain myself.
Think about the last time the market went down and you called your advisor. I’m going to put on my Karnak the magician hat here and just gaze into my crystal ball as to what their advice was to you.
“The market’s down! You shouldn’t sell now, do you know how much money you will have lost? You should hold tight until the market rebounds, it always rebounds!” and then you think to yourself, “Wow! What a nice, kind, thoughtful, and wise investment adviser I have! Thank you for talking me off the ledge! I won’t bother you again!”
Then six years go by and the markets boom. You see that peak and you say to yourself, “Oh man I gotta sell before the next downturn comes! Sell high is what they say after all isn’t it?” What does that same advisor say when you call her this time?
“The market is high! If you sell now you’re going to miss out on this party that we’re all having! While we all know the market won’t go up forever, I don’t see any reason that it’s going to stop at this very moment! You’re going to miss out!”
So let’s unpack those pieces of advice here. If you should not sell when the market is crumbling and you shouldn’t sell for fear of missing out on the boom, when is it exactly that these advisers would ever advise you to sell? My theory is that the answer is…never!
Here’s why I think this happens – it has to do with the old adage that you get the behavior you reward. When a person gets paid to have assets invested for you they are going to have assets invested for you! It’s nothing nefarious, it’s nothing anybody can really be blamed for, it’s just a matter of economics.
After all how many people do you know that volunteer for a pay cut? How many people do you know would be happy to say, “You know what?
Even though the action you want to take is going to negatively impact my bottom line, I’m not going to push back at all!” It takes a whole lot of confidence, it takes a whole lot of financial stability, it takes a whole lot of being concerned for other people more than yourself, putting your own paycheck aside when giving people advice and unfortunately a lot of financial advisors a lot of investment advisors and a whole lot of marketing covers that fact up.
So what am I saying? The point I am trying to drive home here is to remember the importance of two things. First, you need to know what you are paying your advisor to produce.
Not, what you think you are paying your advisor to produce, but how your relationship – the fees and commissions that the advisor’s brokerage firm has them under contract for – is designed to reward them. Everyone knows the old adage, “Sell high, buy low.” Unfortunately, too many advisors are unwilling to help you fulfill that mission because it hurts their paycheck.
What about the advisors who do help? Too often, the placating action is to say, “OK to make you happy, I’ll get you into the bond market.”
In actuality, if you look at a white paper from Roger Ibbotson in January 2018 you will see that the return on bonds has been not from their yield or dividends, as is traditional, but for the last decade, the return has been from capital gains. Something Mr. Ibbotson does not think is likely to repeat itself going forward.
The way I look at it is that I center my thoughts on people like Warren Buffett. When the markets went down last time Warren Buffett lost money. Don’t you think he was diversified, read market predictors, and had some ballast in bonds? So are you or your advisers going to be able to somehow do better than Warren Buffett?
Is that where you are placing your bets? Do you believe you are paying somebody who’s going to do better than and be smarter than Warren Buffett? That’s not where I’m putting my money!
Now, the stock market does have its place and for me, that place is for the long term, I’m talking decades worth of time, for growth, but you have time. If you don’t have a decade or so to recover from a loss, the stock market might not work for you.
We will run through the more complex math of returns in the later episode, but for now, let’s just think about the period from the late 90s through the first decade of the 2000s.
In that 15 or so years, you had the dot com boom, the bursting of that bubble, post 9/11 shock, a great run of tremendous growth, and the collapse of the real estate market and the economic crash that followed.
If you look at the S&P 500 for that time period you’ll see that its value at the start of the third quarter of 1996 is about the same as about the end of the first quarter of 2009. If you invested your money in September 1996 you would’ve had 12.5 years pass where your return was almost zero. In fact, let’s actually run some figures on just how stagnant that time would have been for you.
Let’s say you bought 1000 shares at the $680.54 trading price on September 13, 1996. Your portfolio would have been worth $680,540. Pretty nice nest egg you might have put away at age 55 to help fund some retirement fun!
For you, the almost universally advised buy and hold would have been fun through July 14, 2000, when your account grew to $1,509,980 and would have been less fun as you watched that shrink to $828,890 on March 7, 2003.
The fun would have resumed through October 12, 2007, when your account got back up to $1,561,800 and you probably thought you could ease into your age 67 retirement, just 18 months away, with a good return on investment, by the time you actually got to retirement on March 6, 2009, your account was down to $683,380.
That total return of 0.42% is annualized to a 0.03% pre-tax and pre-fee return, meaning that you could have blown the S&P 500 out of the water with a simple Money Market account over that same amount of time!
That’s not good so if you need that money to grow for your retirement. If you were going to draw on your gains over that time, you better have been able to hold your fiscal breath for 12 years.
If you were counting on that decade-plus to ignite your retirement fund, you are going to be disappointed. Now there is another kind of return other than the increased valuation of stock – dividends – and I believe the dividend yield from that time was about 1 1/2%. With that, you’d have about 2% total growth over 12+ years. Let’s take your adviser’s fee out of that, let’s say it’s 1%, and between gains and dividends you’ve got about 1% growth over 12.5 years. That is a loser’s game.
You may be saying, “That’s an awfully specific example, my retirement funds won’t go through that.” And you are absolutely right! The chances your funds go through that situation to the ‘T’ are about the only thing worse than your hypothetical 0.03% annualized return rates from that time! But that doesn’t mean you’ll do better.
As small as again I gave you, I could have easily picked two dates that would have given you a loss over 12.5 years. The fact is that none of us know the future of the stock market and when it comes to money you need for retirement, you cannot afford to rely on the stars aligning between your birth year, retirement age, and the stock market.
The situation I just laid out would have applied to someone born in late 1945 to early 1946 – aka the very beginning of the baby boom – think there are a few people who felt exactly what I just laid out? Of course, there were!