What is scarier than Ebola to me is allowing you to run out of money before you run out of time. It would be a nightmare to wake up one day only to find that the money is gone and you are still here. When it comes to the Ebola virus we can see that Dallas wasn't as well prepared as New York. New York Governor Andrew Cuomo said on CNN that Ebola in NY was not 'unexpected' and that the state had been preparing as well as it could for this circumstance. He went on to say,
We had the advantage of learning from the Dallas experience.;
Visit our YouTube channel & watch More Scary Than Ebola video http://www.youtube.com/watch?v=sX-rC2kcSis
When it comes to your wealth, what have you learned from experience? My favorite bumper sticker reads, "Experience is like a comb nature gives you once you've become bald." Before going bald, or at least as you take income, let me remind of the two best moves I believe investors can make. When we look at what we can learn from 2001-2010, also known as the Flat Decade, to be better prepared for the good, the bad, and the ugly you know is in your future I suggest that your first step is to look for active management strategies that can move your money off the table from risky assets in a bad time to cash instruments so that you might limit your losses and then move your money out of defensive positions of safety and back on the table in good years back into risk assets in good times. The second step is to consider the alternatives to mutual funds. Look for asset positions that have little or no correlation to the stock market . As you have seen, what goes up simultaneously often comes down with a thud when markets turn bad. You don't want to even try to catch a falling axe. It may not end well.
Active management 2001-2006
Active management 2007-2014
These charts represent an actual example of a money manager's approach to active management as opposed to passive style investing that produces the roller coaster ride that can scare the happiness out of investors. It is one of the approaches used today to reduce volatility in an effort to provide more consistency. The strategy applies to bonds as well as stocks and the movements you see here are from 20%-100%. The green arrows represent the buys and the red arrows represent the sales. Think along the lines of wax on/wax off. The idea here is to look at your account daily ready to take money off the table out of bonds or stocks in bad markets (red) and putting money back into risk assets like bonds or stocks back on the table in good markets. The investment managers use their own combination of technical, quantitative, and volume analyses to make changes in your account so you can reduce worry.
When you don't need the money you don't have to care so much what the money does. Whether the account doubles in value or experiences an 80% loss, it really doesn't matter. It is, however, when you do need the money that everything changes. Negative volatility is not your friend on top of the withdrawals that you may have to take or need to take.
Drawdowns can spell disaster
The maximum drawdown (this shows the maximum percentage drop in portfolio value from its high point to its low point before reversing back-up) was over -53% from the market peak in October 2007 to the eventual bottom March 2009, according to the Practical Quant. If on top of that loss you had to take income you may find you need over 120% gain in one year to get back to even. If the account was moved to cash after a decline and you took just one withdrawal your money may never get back to even. Never is a very long time. While past performance is no guarantee of future results, my suggestion is that you take the time now to look for evidence that shows losses might have been limited to 20% in 2000-02 and again in 2008-09. If an investor is successful in reducing losses to -20% you only need a gain of 25% in the next year to get back to where you started. That is better than needing 100-1000% gain to restore your life savings. It is helpful to put the odds in your favor when you can.
The S&P 500 has had as much volatility during October 2014 as it had in the previous 6 months, according to BTN Research. No investor wants to have the experience that the money is gone but I'm still here. I am encouraging you to see what you might need to do today to stay in the game through retirement. Take advantage of your experience and identify different strategies now. Start before the grits hit the pan again and before withdrawals and drawbacks put you in a position where you can never recover. Never is a long time.
The S&P 500 Index is unmanaged, investors cannot directly invest into the S&P 500. The S&P 500 is comprised of 500 widely held securities considered to be representative of the sotck market in general. In general the bond market is volatile and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Example used as illustration only, not indicative of any particular investment, actual results will vary. These rates are used for hypothetical illustration only and may not be used to predict investment results. Income from investments may fluctuate and the value of the investment may fall against the interest of the investor. Investment decisions should be based on an individual's goals, time horizon, and tolerance for risk. Please consult your investment professional for additional help with your investment.
The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. Investment in stocks will fluctuate with changes in market conditions and indices are unmanaged measures of market conditions, it is not possible to invest directly into an index.
Securities licensed associates at Investors Advantage are Registered Representatives & Investment Adviser Representatives. Securities and investment advisory services offered through NATIONAL PLANNING CORP. (NPC), NPC of America in FL & NY, Member FINRA/SIPC, and a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies.