According to Massachusetts Institute of Technology, “Risk is a complex board game produced by Hasbro that involves both luck and skill. The goal is simple: take over the world. Despite this simple goal, the game is very complicated and dynamic. Players attempt to take over the world by eliminating all other players." The author of The Strategy of Risk, Garrett Robinson, closes with these final words. First Robinson observes that there are both offensive and defensive strategies that arise from the dice probabilities and the game board. Then he goes on to say, “Perhaps the best strategy for the game is to play a few times and develop a unique strategy. The game is different each time you play and each person you play will have different tendencies.” Investing is a lot like the board game Risk. Right before your very eyes, things change. Things like the odds, market conditions, assumptions, distance to goal, inflation, and the major wild cards, longevity and health care costs. For this work on YouTube, please watch:
The American mantra must be “Spend baby, spend!” when it needs to become “Save baby, save!” The median retirement account balance among all households headed by people from 55 to 64 was only $14,500 in 2013, according to the Center for American Progress. In a new TIAA-CREF survey 84% of adults polled in a survey want a guaranteed income stream in retirement as 46% are concerned they will run out of money. Only 14%, however, have purchased an annuity that might secure a steady stream of lifetime income. Ed Van Dolsen, president, retirement and individual financial services at TIAA-CREF said, “For many Americans, annuities are often unknown or misunderstood, which is unfortunate since they are the only way to generate retirement income that cannot be outlived.” The guarantees of an annuity contract, including fixed returns, payouts, and death benefit guarantees are contingent on the claims-paying ability of the issuing insurance company. I am not advocating the purchase of any annuity or recommending any specific investment. I am suggesting that you take the time to do your homework and meet with a financial services professional who can help you look at the investment options that may well serve you and your long-term goals.
“As financial advisers roll through annual client reviews, many will face the task of having to explain how their portfolio strategies so badly lagged the 13.7% gain by the S&P 500 Index last year,” said Jeff Benjamin. He goes on to say that matching the index last year would have involved too much risk. Benjamin submits, “Fact is, a truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any adviser who generated returns close to the S&P was taking on way too much risk, and should probably be fired.” Like it or not, investors have become programmed to be preoccupied on the performance of a few high-profile benchmarks. Certainly everyone is happy when good money is made, but that saw cuts both ways. It is not uncommon for one year’s favorite investment position to become next year’s dog. Financial advisers who have done their job correctly might suddenly feel as if they have to make excuses for the results.
“Periods like 2014 are why people think they should just go buy the index,” said David Schneider, founder of Schneider Wealth Strategies. Let’s understand that the S&P 500 represents just one asset class and that is large-cap stocks. And let’s remember that in 2008 this is the same asset class that lost -37% of investor assets, according to Yahoo Finance. Further, after such a loss it may be that stock investors did not get back to even until sometime 2012-2013, assuming there were no withdrawals.
What's a poor investor to do?
No matter how little time you think you have left or how little it is you have to invest start now. If you have started already, increase your contributions to your plan. Use time to your advantage so that you can increase your odds of being able to retire with dignity. Instead of being overly focused on an index pay particular attention to your unique goals. If you are on track to have the amount of money you need regardless as to whether the market is up 90% or off -90% you may be able to avoid a lot of drama. To the extent that you cannot accept the risk of a major market loss, seek out ways to diversify more than you ever have before. Finally, identify active management strategies that can take money off the table in bad markets and put that money back on the table in good markets. Rather than swing for the fences looking for a home run to offset losses, look at what you can see might limit losses in when markets move against you. Think along the lines of this question. Where can I see the evidence that when the markets are in serious negative territory, say -50% for example, is it possible for me to see that my losses might have been -20% or less. We know that past performance is no guarantee of future results. We also know that a loss of -50% means you need a gain of 100% to get back to even. A loss of -20%, however, requires a gain of 25% to get back to your starting value. You probably aren’t that interested in taking over the world. You may, however, be on a vital mission to save your assets.