I am just back from attending the Irrational Economic Summit hosted by HS Dent's research team. There were over 300 people in attendance that included professional investment advisors and wealthy investors from around the world. This is the first time I have been in a three day workshop series that was comprised of both advisors and multi millionaires from places as far away like Taiwan and Ecuador. One of the attendees I got to chat with is a general surgeon from Denver. I asked Tim what was the inspiration for him to leave his practice. This physician made it very clear that while he liked his financial advisor on a personal level he still felt stung by watching his portfolio drop about 50% in 2008. He was inspired to look for better answers and better strategies in the event another crash was in his future when he needed the money the most. I found myself apologizing for my peer and asked if I could offer him a second opinion.
One of the things that makes me different from other financial advisers is that we have paid up to $10,000 a year for independent research. Earlier this year, John Bogle, the founder of Vanguard who has preached from day one it's all about low cost index funds, made the most amazing statement on CNBC; that investors over the next decade "should prepare for two 50% declines" in the stock market. In another equally amazing quote from this TV appearance Bogle said, "Don't worry about what stocks are doing today, tonight or tomorrow … lookout a decade. It requires some guts to do this." I can understand part of what Bogle is saying. Most investors don't do as well as the overall stock market because emotions take over and they move to cash. In addition, according to Business Insider, March 2012 , 84% of mutual funds in 2011 failed to beat their benchmarks. While I like John Bogle, unlike you and me, he lives on a different planet.
I apologize for my peers and John Bogle
If John Bogle is correct, why would Dr. Tim or any investor in their right mind invest in the stock market without some strategy to avoid his prediction of two more 50% declines? In the words of George Santayana, "Those who cannot learn from history are doomed to repeat it."
Learn from the Worst
When you are working and putting money into investments severe declines can be great opportunities to pick up more shares at attractive prices. The world we live in becomes a very different place, however, when we start taking income from our investment accounts. Instead of looking at the averages over the past 70 or 80 years and hoping for the best, let's focus on the worst economic situation we have ever seen and prepare for the worst. As we see with the disaster in the Phillipines, it's all about survival. Let's use stocks in the Great Depression as our worst case scenario. Let's suppose we were around in 1929 with $1,000,000 in the market. When we look at the DOW, thanks to YahooFinance, we see that the stock market peaked late 1929 and dropped about 90% from peak to trough in mid 1932. So after life was good, our $1,000,000 account became $108,360. For the "buy & hold" crowd it wasn't until 1954 or roughly 22 years later before our original value was restored 100%. That's assuming we waited over 20 years and did not take out any money. How realistic is that?
Ask better questions. Get better answers.
We don't know what the future holds, but we can all agree that the end of the year is coming. Rather than hold and hope, now is the time to ask questions about how you might be better prepared for the good, the bad, and the ugly. If you are ready for an 8.5 earthquake you will likely be able to tell your story whether or not one occurs. If you are not prepared you may be a statistic. Ask questions about how investors might have been better prepared in 2000-02 and 2007-08. Focus on placing disciplined downside protection strategies in your portfolio today to help you manage the unexpected natural and man-made disasters tomorrow. Be prepared. Get ready.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
This information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice and the opinions expressed are not endorsed by NPC. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action.
While there are over 3,000 local financial advisers with many different opinions, it’s possible that not all firms in the Conejo Valley pay for independent research. This independent research is one of the features that helps investors see the larger picture and make appropriate, if not more informed decisions. The independent research has been used with investors in the workshops the firm conducts since1999 when John Grace became Master Certified and a Charter Member with the H S Dent Advisor’s Network.
“Master Certified” references those who pay a fee to learn about various economic trends and have demonstrated by passing tests the ability to effectively answer.
Investments are inherently risky and will fluctuate with changes in market conditions. Consideration should be given to the possible loss of a part or all of principal invested.