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The financial services industry
has duped unsuspecting investors out of millions of dollars.
For decades, they’ve said the best way to invest was to buy
an investment and hold it decades. I think they’re crazy!
The key to greater stock market returns is a little-known
secret shared by some of the most successful stock market
traders. It is simply this: better returns begin by
minimizing losses.
That’s right. It’s not some undiscovered method for finding
that special stock that will go up 1,000%. It’s not digging
through the near-microscopic footnotes on a company’s
balance sheet. It isn’t reading technical charts in an
attempt to anticipate the future. All of these methods can
be used to help select which investment to buy. The key is
what you do after you buy it.
Brokerage firms and their army of advisors have been
preaching the wonderful benefits of Buy and Hold for
decades. It’s been taught in colleges and the courses
advisors are required to take in order to earn advanced
designations.
Buy and Hold has been supported by legions of mutual fund
and insurance company representatives. These ‘wholesalers’
sell your broker or advisor on recommending their products
instead of their competitor’s. They produce beautiful
brochures that show an investor will suffer irreparable harm
if the 5 best days each year are missed–but more on that
later.
Buy and Hold is based on historical returns. The historical
return on equities over the last 30 years has been roughly
10%. It’s these historical percentages that are used by most
financial planning software to help project how much you
need to save in order to retire or how to divide your
portfolio so your money lasts longer than you.
If these assumptions are wrong you will have to work longer
before you can retire. You will have to live with less
during your retirement. Millions of retirees have been
forced to go back to work in the last few years because they
believed these assumptions.
These assumptions are based on the belief that low
short-term market returns will ‘revert to their historical
mean’ over time. In other words, just because the market
didn’t earn 10% this year or the year before that or the
year before that (!), just ‘hang in there’ because
eventually you will earn the historical average.
Buy and Hold demands you do nothing while your investments
lose 20-50% or more of their value. Buy and Hold is why your
advisor expects you to “just hang in there.” You may recover
those losses, but how long will it take?
How come the advisors using charts that show decimated
returns because the 5 best days were missed each year never
show a chart of what would happen if the opposite occurred?
What if the 5 worst days each year were missed?
They don’t show you just such that chart because they don’t
know what would happen. They’ve never looked into it. They
just toe the party line.
A study done by Birinyi & Associates measured staying fully
invested from 1966 to 2001 versus if missing the 5 worst
days each year. The Buy and Hold return period was 1,071%
meaning $10,000 grew to $107,100.
The return of missing the 5 worst days each year was
a whopping 98,612%.That means $10,000 grew to $9,861,200!
No one can predict when the five worst days of the market
will be each year. Nor can they predict when the five best
days will occur. It’s common sense, though, that the more
money you lose the longer it will take to earn that money
back. Why not just prevent big losses in the first place?
Not all advisors preach Buy and Hold. Some realize the
secret to greater stock market returns starts with a
fanatical focus on minimizing your losses. I’ve
invented a money management system designed to produce
dramatically higher returns while significantly lowering the
potential for loss. It does so making sure small losses
don’t turn into devastating ones.
In turns out you were right--it doesn’t make sense to sit
there and do nothing while your investments drop like a
rock. If your advisor preaches the benefits of ‘investing
for the long-term’ or tells you to ‘just hang in there’ give
me a call. Your lifestyle and retirement could be at
stake.
Mr. Voudrie is a Certified Financial Planner, nationally
syndicated columnist and President of Legacy Planning Group,
Inc., in Johnson City, TN. For more information call
1-877-827-1463 or email
jeff@guardingyourwealth.com.
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