Guarantees Against Market Crashes Guarantee Investors
Will Eventually Lose Money
by: Brendan Magee
I was listening to a radio advertisement for a show that guarantees to educate investors how to never lose money should the stock market crash. Sounds like a good idea, especially for retirees. Who would ever want to go through the pain and heartache of 2008's market crash again?
Unfortunately, investors in their attempts to find the holy grail of investing often give up way more than they realize. In this case if they are in the position that they will never have to experience losses due to a stock market crash, they also guarantee they will never enjoy market rates of return.
To make this point we have to go beyond what the media typically reports on when talking about investing, the S&P 500 and the Dow Jones Industrial Average. These are benchmarks that report solely on U.S. Large Companies. The market consists of many more categories of investments and we will take a look at what a few of those investment categories have done in the recent past.
Investment Category Annualized Returns 2000-2014
S&P 500 4.24%
U.S. Large Cap Value Index 7.84%
U.S. Small Cap Index 11.50%
U.S. Small Cap Value Index 13.95&
Int'l Small Cap Index 8.55%
Int'l Small Cap Value 7.57%
Emerging Markets 7.38%
Now here's a couple of things to bear in mind, over the past 20 years ending December 31, 2014, the cost of living has gone up 2.80% and the average stock mutual fund investor's return was only 3.69%, according to the Dalbar Report.
The market rates of return mentioned above do two things: outperforms the average investor by a considerable amount and outpaces the rising cost of living. That means market rates of return are more than enough to have an investors money maintain its purchasing power and last longer. How upset would you be if over the past 14 years these were the returns you achieved?
Now where the idea of "Crash Proofing" your portfolio comes from is off the heels of 2008 when the S&P 500 fell almost 40%. So how do I as an investor make sure I never go through that pain again? Answer, take my money out of the market all together.
Unfortunately, investing is a counter intuitive process. What appears to be the logical solution isn't. Matter of fact the most logical solution most likely will do more damage than the investor realizes. In the case above, if I take my money out of the various markets, my money is in something else that won't generate the kind of returns listed above. The problem is that when ever there is a lot of investor turmoil there is always someone who stands up and shouts they have the solution that will cure your problem for ever. That solution usually has the investor breaking the rules for long-term successful investing.
Here's what I mean by that. The market tanks. You're ticked off at seeing your portfolio take a beating. You're scared that if the beat down continues, you'll be left with nothing. Someone offers a solution that you will never have to suffer like that again. All you have to do is move your money over to their account. You proceed and you just broke the golden rule of investing, you sold low after buying high. The impact of the loss you just experienced is permanent. If you ever do get back in the market it will only be after the market has gone on to record highs and you don't want to miss the party. Now you sold low and then bought high. you compounded the mistake. The odds of your money lasting through retirement are getting smaller by the minute.
The solution isn't Crash Proofing anything. It's the investor staying true to the rules of successful investing no matter the situation. It might also be having someone in your corner who won't let you waiver even if you consider straying from the straight and narrow. Josh Hamilton of the
Los Angeles of Anneheim Angels could have used a coach. Maybe you could too.
Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments e-mail Brendan@coachgee.com or call 610-446-4322
The rates of return listed above are not guaranteed. Investing involves the risk of losing principle. Consult with an investing professional before making any investment decisions.
