|
These days, open up almost any newspaper and you’ll find it
jam-packed with heartbreaking stories about baby boomers whose
life savings and lofty dreams of retirement have been replaced
with the imminent possibility of working into their 70’s just to
survive.
There are plenty of people to point fingers at as
this bubble continues to burst; however, some
speculate there is much that boomers could have done
to ensure their nest egg was safe no matter what the
financial climate.
If you went to a casino and found yourself up
50%, you’d likely cash out,
for fear of losing your new found winnings.
So why did so many people stay in the markets after
being up over 90% between March 2002 and October
2007?
Financial advisors often repeat the mantra of
buying and holding, and depending on the time frame
you use, a positive argument could be made. If you
bought and held between August, 1982 and October,
2007, you would have been up over 1800%. A $50 000
investment in 1982 would have been worth $900 000 in
2007 (not accounting for inflation).
Holding for another 18 months would have cost you
dearly, decreasing your nest egg to about $423 000.
For those who started putting money away in the mid
1990’s, the majority of your portfolio is gone.
If you bought in 1997 and sold in Feb 2009, your
return would have been 0%.
Unfortunately, a combination of greed, poor
advice and poor financial planning has lead to many
couples having to wonder "What if..." and "Now what
do we do?"
So what’s the solution? First, forget about buy
and hold. It’s gone the way of the 8 track tapes.
Second, a stop loss is not just for day traders.
If a bear market is defined as a market drop of 20%,
why not set a stop loss 20% below the highs of the
market? Move into cash until the markets move up 20%
off their bottoms.
If you had bought shares of SPY (which tracks the
S&P 500) at the beginning of 1997, you would have
paid about $66 a share. The first time the
market dropped 20% was in early 2001 when the SPY
dropped from $140 to $112. Using the same
theory of buying when the market has moved up 20%
from its bottom, you would have kept out of the
market until August 2003, buying back in at $90.
Once the markets hit their high in October 2007 and
dropped 20%, you would be out of the markets,
selling at $120. The SPY is currently trading at
below $70/share.
With this strategy, you would be up $76 per
share, instead of being up $2. Put another way, if
you had invested $50 000, you would have been
looking at a nest egg of $113 131.31 instead of $51
500 over those same 12 years.
Ultimately, your retirement portfolio is up to
you. Isn’t now the time to start taking charge of
your financial future? Here’s what can you do today
to start investing the right way.
1. Get Educated
Be proactive and learn more about what you are
investing in. With the help of your financial
advisor, identify areas where the two of you agree
are areas of growth. If you aren’t sure, take the
time to get familiar with your financial advisors
suggestions. This will help you identify potential
problems in advance.
Let’s say your financial advisor suggested back
in 2002 that with a low interest rate environment,
housing starts should improve. Taking his advice,
you put some of your money into the housing sector.
As a result, during the following 5 years the value
of your own home would increase very quickly.
2. Watch for Warning Signs
Shows like Flip That House showed how easy it was
to buy a house, hold it for 6 months, and make a
tidy profit. Any time there is easy money being
made, it’s time to start pulling out. For example,
when news stories started coming out about the
subprime market, those storm clouds should act as a
signal to take your profits and get out.
3. Practice in “Seasonality
Investing”
Take advantage of seasonality in the stock
market. While not perfect, the "go away in May"
strategy has worked wonders for many. The worst
performing months to be in the market during the
last 60 years has been July, September and October.
Being invested from November to May has provided
great results. Come May, take your money; put it in
cash or a 6 month GIC.
4. Take into Account Your Age When Choosing
Your Investments
Don’t over leverage yourself. Many people who
were getting ready to retire found themselves 100%
invested in the market. Any smart financial advisor
will suggest that at most, a balanced portfolio's
bond exposure will be equal to their age. For
example, if you are 40 years old, then 60% of your
portfolio should be in equities, and 40% in bonds.
For those willing to take a little more risk, you
could move to a 70/30 mix. For those close to
retirement, you should be mostly in bonds or cash.
Avoid the temptation to take on more risk in
order to increase your returns. Any of these
strategies work much better than buy and hold. Now
is the time to start investing smart.
|
