Retirement Puzzle Piece #1
Diversify and Protect Assets in Retirement
Learning Video: Diversify and Protect Assets in Retirement Part 1
Wall Street will tell us that we need them and that what they do is too complicated for us to understand. But not to worry; what they do is in our best interest. They will tell us that another financial collapse won’t happen. Yet, they will spend billions of dollars fighting reform and regulation.
As a result of the Great Recession (2007-2009), we’re now living in a whole NEW Normal. That means preparing for a different kind of investment environment. Two recessions in just the last 15 years have resulted in two dramatic stock market downturns.
For many people, broad diversification of risk-based investments was not enough to prevent huge losses in their retirement portfolios. Yet, the conventional wisdom on Wall Street still maintains that smart retirement investing is all about building a portfolio of stock- and bond-based investments that will hopefully provide an adequate total return over time.
Wall Street’s conventional wisdom says that stocks are safe in the long term, and that owning significant portions of stocks is necessary in order to produce a secure retirement.
Many advisors on Wall Street continue to operate by the Bull Market Playbook: Take on risk, stay fully invested; buy the dips; stocks and bonds, Wall Street says, always outperform.
But the reality is that giving this kind of Wall Street advice to a person in or near retirement can be disastrous.
Consider for a moment, the risks to an individual in or near retirement when an Advisor puts together a financial strategy heavily weighted towards stocks, bonds, mutual funds and commodities.
The advisor’s financial model will typically either ask for, or rely upon, assumptions for many events that are wildly unpredictable such as how long you will live or how your health will be. Or those assumptions will be grossly overstated in terms of expected rates of return on your risk-based investments.
Think of the uncertainties in your retirement. You don’t know how long you’ll live. You don’t know what investment returns you’ll earn. You don’t know how your health will be. You have only a limited sum of money
to work with. And there are no second chances.
In this age of “New Normal”, the more you know about asset diversification especially which assets are guaranteed and which assets carry various degrees of investment risk and reward, the better off you’ll be. Plus you won’t be so inclined to listen to the Wall Street propaganda machine.
There are at least four issues with what Wall Street doesn’t want you to focus your attention on.
Issue #1: Long-Term Secular Cycles
The stock market operates in long-term secular cycles. A full secular cycle can last 25 years or more. In a secular bull market cycle: the prevailing trend is “bullish” or upward-moving. In a secular bear market cycle: the prevailing trend is “bearish” or downward moving. And within every long-term secular cycle, there are shorter cycles of recession and recovery each cycle lasting, on average, five to eight years.
Despite Wall Street’s recent hoopla about the surging stock market, we have only recently exceeded the pre-recession market highs of October of 2007or even March of 2000 (fourteen years ago). More than one economist has made the case that our current economy has been in a secular bear market cycle since the year 2000.
So if that is the case, how long might this secular bear cycle last? Well, based on historical research, some economists predict that our current secular bear market cycle is about 2/3rd done
Issue #2: Emotions move the Markets
When the Financial Markets are functioning properly, the stocks and bonds in your investment portfolio should either increase or decrease in value based on the underlying fundamentals of those assets. Fundamentals such as corporate profits or expected growth rates.
But all too often the Financial Markets oscillate, sometimes dramatically, based on emotions and reactions to news stories from around the world. And in recent weeks, the markets have once again been very volatile, mainly due to concerns over the price of oil.
Issue #3: Investing versus Speculating
What is the difference between Investing & Speculation?
Well the meaningful and traditional idea of investing is that you buy something and get paid for owning it. If you buy an apartment building, you’re collecting rent. If you buy a bond, you collect interest.
Speculating is something entirely different yet it is commonly mislabeled by Wall Street as investing.
Your stockbroker realizes that speculation has a negative ring to it. So the best way for him to get you to speculate is by convincing you that you’re investing. But if you buy an asset simply because you hope that you will be able to sell it for more at some later date, you’re speculating. The stock and real estate bubbles of the last 14 years have been rife with speculation disguised as investments.
Issue #4: Impact on the Market from High-Frequency Trading
Some very smart humans have designed some very sophisticated computer algorithms that place blizzards of buy and sell orders – many of which are instantly cancelled – all in an effort to detect and exploit the tiniest shifts in demand for stocks. This kind of trading now generates some two-thirds of all share volume on US markets.
This flood of orders, driven not by investors evaluating stocks, but simply by computers, makes markets increasingly vulnerable to incidents like the infamous May 2010 “flash crash.” The stock market plunged hundreds of points for no evident reason and lost nearly 10% of value in just a few minutes.
Today, because of the stock market’s evolution, Americans don’t stand a chance of investing as amateurs. As computers, powered by technical traders take over, it becomes more common place for Americans to see their nest eggs shrink by thousands of dollars in minutes for no tangible reason.