Secure Your Retirement (eBook)

Chapter 1

Why Buy and Hold Could Kill Your Retirement Plan!

There are certain words and phrases you just don’t want to hear from the professionals who are supposed to be looking after your health.

Expressions you don’t want to hear from your medical professional are, for example,

“Oops!”

“This is really, really going to hurt.”

And my personal favorite: “Nurse, I’m going to need a mess of towels, a vacuum pump, a Phillips-head screwdriver, some super glue…and get my lawyer on the phone.”

If you expect the medical professional looking after your health to be competent and not to make mistakes, shouldn’t the same be expected of the financial professional looking after your wealth?

Are you sick and tired of hearing the same flimsy excuses and bogus explanations from your financial advisor when you open up your account statement only to discover that you have lost money?

“Don’t worry; just hang in there.”

“It will come back; you just need to give it more time.”

And my personal favorite: “Well, don’t feel like the Lone Ranger. Everybody lost money in this last correction.”

Shortly after the stock market crash of 2008, I interviewed a couple who told me that they had lost half of their life savings in that Wall Street debacle. They were in their early 60s and owned a small business. They had saved enough to provide them with a decent income in retirement. Their plans had been to wait until January 1, 2009, turn the business over to their son, buy themselves a small camper, and finally do some traveling. They felt like they deserved it. They had, after all, denied themselves many luxuries to build the business, provide a nice home for their two kids, and send them to college. They had always been self-employed, so neither had a pension. But they figured that if they were careful with their expenses, the money in their investment account, combined with their Social Security income, would enable them to maintain a relatively comfortable lifestyle in their sunset years.

Then the bottom fell out of the stock market. They watched in nervous amazement as the stock market tumbled 777 points in one day on September 29, 2008. This couple, perhaps like many others, had not busied themselves with the details of their invested assets. They left all of that to their financial advisor.

“Just hold on,” their financial advisor told them. “The market always comes back.” So, not knowing what else to do, they stayed put. You know the rest of the story. The market continued its downward slide, and nearly half of the money they were counting on for retirement income went poof in the wind like dandelion spores in a stiff breeze. Naturally, these trusting souls felt betrayed.

“What got me,” said the man, “was when our broker told us the thing about the boats in the tide.”

I asked him what he meant. The man explained how his financial advisor had, in an attempt to console them, offered them the illustration that when the tide goes out, all the boats go down. Then when the tide returns, all the boats rise.

“I know something about the tides,” said the man, who often fished off the North Carolina coast. “This wasn’t a case of the tide going out. The whole ocean disappeared!”

“Yeah, I can’t believe he said that,” his wife chimed in.

What Would They Say?

If you were to ask your current financial advisor how he or she did in 2008—and, more importantly, what their plan of action is for the next “2008” when it comes—what do you think the answer would be? Hopefully, you aren’t asking for the first time right now as the market again plummets amid a worldwide pandemic and government reform with economics experts warning that, in fact, we may have already reached the next “2008.” If your advisor says that over time, the market will go up—you just need to “hang in there” and stay invested—perhaps consider finding a new financial advisor. That’s Wall Street doctrine: always remain invested, regardless of current conditions. It’s bad advice for soon-to-be retirees.

The buy-and-hold ideology makes about as much sense as hanging from a tree limb until you can’t hold on any longer. If you happened to find yourself in such a precarious situation, desperately straining, your grip weakening by the second, what would you do? While you still have strength, the smart option would be to pull yourself up or maybe to swing safely to a lower branch. But what if instead your buddy (who’s watching safely from the ground) were to insist you not do anything to help yourself, but rather “just keep hanging on.” You’d probably laugh at such ludicrous advice. Without anyone coming to rescue you, what’s the use in hanging idly? You can’t hang on forever; you’re just wasting valuable time until your body gives out and you fall.

When brokers advise you to “just hang in there,” it makes about as much sense as your buddy’s advice to keep hanging from the tree. It’s unsustainable. Eventually, you won’t be able to endure the market loss, especially if you’re already retired and drawing from those funds. Inevitably, you’ll “fall”—you’ll have to sell out, probably at the bottom of the stock market.

You may be wondering why buy and hold is so often preached when it almost never works for aging investors. It’s because the people saying it need you to stay in the stock market. It’s their industry and they need clients. Can you imagine your mutual fund company ever calling to tell you, “Market conditions are bad right now, so it would be prudent to exit your fund and park your money in safety for the time being”? Didn’t think so.

What if other industries did this? You would lose all trust and never use their services. For example, suppose you are talking to an airplane pilot who tells you, “I never pay attention to the weather. I just take off no matter what.” I don’t think you would ever board that plane! But the fact is, many people hand over their life savings to a financial advisor, money manager, or mutual fund company whose investing philosophy is that you should always be invested, regardless of market conditions. They trust these advisors to get them to their destination of financial security and adequate wealth for a worry-free retirement. Is that wise?

The History of Buy and Hold

What I am about to share with you in these next few paragraphs is an unpopular truth—unpopular, that is, among those who adhere to what is called the buy-and-hold philosophy of investing.

Personally, I hate the noise that sirens make. They are grating sounds that I wish would go away. But usually, they are warning me of something and telling me that I should take some action for my personal safety. I want you to see the truth about buy and hold so you can take action and do something different to grow your money and protect your portfolios from major decline.

Let’s start with some history. For years now, most investors have been taught lies and fed false information when it comes to investing strategies. I am reminded of a famous quote by H. L. Mencken, an American journalist, satirist, and critic from over 100 years ago: “The men the American public admire most extravagantly are the most daring liars; the men they detest most violently are those who try to tell them the truth.” Unpopular or not, I intend to tell you the truth and back it up with hard facts.

When do you think buy and hold works the very best? That’s right; when you are in a bull market, that is, a time when the market is on an upswing.

Take the bull market that started in January 1990, for example, and continued through March of 2000. That was a bull stampede! It was a decade of virtually uninterrupted growth. The S&P 500 grew by an impressive 455 percent. Think about it in terms of cash. If you had invested $100,000 in January 1990 and just let it ride, your $100,000 would have been worth $455,000 by March 2000.

The reason for the major expansion during this era was the staggering growth of individual stock ownership—from 15 percent to 55 percent. Why did that happen? Because companies were ditching their traditional defined benefit pension plans and moving to 401(k) plans. There was a tremendous influx of cash into the stock market during that decade. It came in one paycheck at a time from millions and millions of ordinary savers across the nation. Primarily, those dollars went to buy shares in mutual funds held by 401(k) plans. Buy and hold was king during this ten-year period. But what came next? The downside!

From March 10, 2000, to October 9, 2002, the market lost $9 trillion. The S&P 500 lost 49 percent, and the NASDAQ lost 79 percent. The average investor lost 47.4 percent.