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If you are retired or near
retirement, you need to understand a major weakness of the
popular Buy and Hold strategy of investing. Read on to learn
what it is and how you can protect yourself.
For years we’ve been told that the only safe way to invest
in the stock market is to ‘Buy’ quality stocks or mutual
funds and ‘Hold’ them for the long-term. This strategy may
work well for someone in their twenties or thirties, but it
has the potential to severely impact those in or near
retirement who depend on their nest egg for income.
Barry retired at age 55 with a healthy $750,000 nest egg.
That would have been more than enough to provide for him and
his wife, allow them to travel and to live their retirement
dreams for the rest of their lives. Unfortunately, Barry
made the mistake of following the advice of his previous
broker who touted the Buy and Hold strategy of investing
(B&H).
You see, B&H says that there isn’t any way to ‘time the
market’. It also says that if you are not invested for even
a handful of days over a 10 year period, that it can
significantly reduce your return. Therefore, it’s reasoned,
you should stay invested and just ‘weather’ the difficult
periods when the market declines in value. “It will come
back, just hang in there,” its proponents argue.
This defies common sense. It’s like telling one of my
daughters to wear her bathing suit all winter and to stay
outside by the swimming pool, because the hot weather will
come back next year!
Barry found this out the hard way. After 3 years of staying
out in the cold his $750,000 retirement savings were only
worth $350,000. His and his wife’s dreams of traveling and
enjoying a comfortable retirement were gone. He has been
forced to go back to work, hoping to retire again in 4
years.
The reason that B&H doesn’t work well for seniors is because
it assumes you have the time to recover from a severe market
downturn. But few realize the implications of this belief.
For instance, if you invested $100,000 in the S&P 500 index
on January 3, 2000 it would only be worth $62,626 on
December 31, 2002, three years later. That’s a loss of
almost 38%. “But hang in there,” the B&H strategist says.
“It will come back.”
Well, let’s look at that. Assuming a constant 10% annual
return, it would take an investor almost 5 years to recover
what was lost. A constant 7% annual return would require 7
years to reach $100,000.
So the B&H investor would have to forgo any income or
use of that money for 8-10 years and still would only have
their original investment! Are you willing to leave your
money untouched for 8-10 years and come away with the same
amount you put in? I doubt it. That’s why the B&H strategy
can be dangerous.
I believe strongly in investing in the stock market. Even
someone who is retired should have a portion of their money
protected against rising prices—something the stock market
does well. It is vital, though, that seniors employ certain
safeguards.
To keep from repeating Barry’s mistake, you need to
determine the maximum amount you are comfortable losing. For
instance, if you are investing $100,000 perhaps you set a
‘floor’ at $90,000. If your portfolio declines in value to
the floor amount, you take action. That way you know you
only have 10% of your portfolio at risk
The second point is to make sure this ‘floor’ rises as the
value of your portfolio rises. If your portfolio goes up
15%, you’ll want your floor to increase 15%, too. This will
help you lock in your gains along the way.
If the value of your portfolio approaches your ‘floor’,
determine why. Then sell the investments that are the cause
of the drop and reallocate that money somewhere else, based
on your situation, risk tolerance and what’s going on in the
market and economy.
Find out more about the dangers of the Buy and Hold strategy
of investing and the steps you can take to protect yourself
by visiting www.guardingyourwealth.com or by calling
1-877-827-1463.
Mr. Voudrie is a Certified Financial Planner and President
of Legacy Planning Group, Inc., a Private Wealth Management
Firm in Johnson City, TN.
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