How many times in your past have you been told to “ride out the stock market” regardless of how much volatility you have to live through or how much you lose each time? Probably too many times to count. Probably so many times you are sick of hearing it over, and over, and over again. Whether you have an advisor, or you do it yourself and take advice from books, the internet, the radio, or even friends, you have heard these supposedly sacred words over and over again. RIDE IT OUT! RIDE IT OUT! RIDE IT OUT! It’s basically Wall Street’s mantra.
You could have heard it many different ways such as hang in there, don’t worry, you’re in it for the long run, don’t get out now, stay invested no matter what, and maybe even as a challenge to your intelligence and courage? How did you feel every time you heard any phrase that meant “ride it out”? Here’s what I bet, whenever you were told “ride it out,” you didn’t like it at all and you probably didn’t agree with it. And even though you really never agreed with it, you would never admit it in public for fear someone would think you were stupid for not agreeing with what you were always supposed to do, or think of you as a wimp that didn’t have the stomach to brave through a stock market crash. Here’s what I say, I think you should never ride out a large stock market loss, ever.
During the 2000-2002 Technology Bubble, when the stock market lost approximately -50%, and you were told to “ride it out”; if you did ride it out how much did you lose, and how did you feel? Did your 401K become a 201K like many did, because you lost -50%? Did you have a moderate or high level of anxiety? Try and remember how you felt when this happened. Then, when you finally recovered by 2007, and during the 2008 Financial Crisis the stock market crashed another -50%, how much did you lose and how did you feel? In both crashes, many people just like you lost -50%, and they all felt terrible. Not one person who lost a lot of money stated “I am so happy I just rode the stock market down like my advisor told me to do, that was such great advice, and I am so grateful for it.”
The 1st Problem
You have no idea what “riding it out” really means. You’ve heard the phrase “ride it out” countless times. You’ve been told this is what you must do, it’s the only way to be a successful investor. You took this advice and “rode out the stock market” time-after-time. But, did you ever really understand what you were doing? Did it really work? What does “riding it out” really mean? Does it mean “riding the market up?” No, it definitely doesn’t. “Riding it out” literally means “riding the market down.”
And why would you ever want to ride anything “down,” especially the stock market that takes your portfolio along with it, DOWN? I don’t and I won’t ride my investments down, you shouldn’t either, and I will never recommend that a client rides the stock market down. My clients will NEVER hear me say that they should “ride out the stock market,” ever. Just like you, I have worked too hard to accumulate my assets, and I don’t want to lose a big chunk of my money simply because I listened to the old, bad, out-of-date, dysfunctional advice that says to “ride it out.” And you don’t want to either, because what would happen to your chances for retirement success if you rode the market down -50%, or even -40%, or -30%? The stock market would recover after the crash, but you might not ever recover.
The 2nd Problem
You haven’t been taught how bad losses really are, how much losses can crush your chances and dreams of a wonderfully secure retirement. You have been taught that big gains are what will make you tremendously successful, and you have to risk money for the mere chance of receiving big gains. The problem is you haven’t been taught that losses are way harder to make up than you’ve been told. You haven’t been told that after you lose money, you have to earn significantly more than you lost just to break even.
It seems fair that after you suffer through a -50% loss, you only need a +50% gain to recover. Lose -50%, make +50%, and voila, you’re even. It sounds fair, but unfortunately it doesn’t work that way. Mathematically if you lose -50% you need to make a +100% recovery gain just to break even, not to make any money, just to break even. Here’s why:
If you have a $1,000,000 IRA and you lose -50%, your $1,000,000 loses -$500,000 and your remaining IRA balance is now $500,000. If you earn a +50% gain on your $500,000 reduced IRA balance, you only make $250,000 of gain, which brings your IRA to $750,000, far short of full recovery.
If your $1,000,000 IRA loses -50% and drops to $500,000, you need to earn $500,000, a +100% gain, just to recover, not make any money, just recover. A +100% gain to recover could take a long time, if it happens at all.
I have had some retirees tell me they don’t think the stock market will ever crash and lose -50% again. When they tell me that, I always respond the same way and literally ask them “ARE YOU CRAZY?” The stock market lost -50% from 2000-2002 during the Technology Bubble and then from 2007-2009 it lost -50% again during the 2008 Financial Crisis.
Even if you don’t lose -50%, it can be very painful. If you lose -40%, you need a +67% gain to recover. If you lose -30%, you need a +43% gain to recover. And if you lose -20%, you need a +25% gain to recover. Is it easy and guaranteed you’ll earn +100%, +67%, +43%, or even +25% in a short period of time? No, it’s not.
Solution: The Golden Rule Of -5% to -10%
I have created a system, a roadmap, a guide, to help retirees and people nearing retirement position their assets to minimize the possibilities of a big loss; I call it “The Golden Rule Of 5% to 10%.”
“The Golden Rule Of 5% to 10%” states you must position your assets so that you never suffer a loss of no more than -5% up to -10% , even if the stock market crashes -50%. If you lose -5%, you need a +5.3% gain to recover, while a -10% loss requires a recovery gain of +11.1%. Recovery gains of +5.3% and +11.1% are a lot easier than recovery gains of +25%, +43%, +67%, and +100%. And right now, you can’t afford a big loss and you may not have the time to recover.
Investing your money during retirement with no clue of how much you could lose in the next stock market crash, no idea of how much risk you are really taking, is like driving your car in the desert with a broken fuel gauge. And it’s pretty obvious, you shouldn’t do either.
Keep your money safe out there!
None of the material in this presentation is intended to give you specific tax, investment, real estate, legal, estate, retirement, or financial advice, but rather to serve as an educational platform to deliver information; nor is it intended to show you how the strategies presented can specifically apply to your own tax, investment, estate, financial, or retirement position, but rather to offer an idea of how these principles generally may apply. This data is furnished with the understanding that the authors and publishers are not engaged in rendering you legal, real estate, accounting, estate, investment, tax, financial, retirement, or other professional advice or services through this presentation. None of the material in this presentation is intended as a solicitation for you to buy or sell any financial product. Nothing is directly or indirectly guaranteed by this presentation. A fixed index annuity with an income rider can protect your savings from losses and provide you guaranteed lifetime income, but you could incur surrender charges, gains aren’t guaranteed, you’ll pay a fee, and guarantees are backed by the financial strength and claims paying ability of the issuing annuity company. Any investment in stocks, bonds, or mutual funds can lose principal, even with a stop loss, and there are no guarantees of gains. All investments involve risk and investment recommendations will not always be profitable. The sale or liquidation of any stock, bond, IRA, certificate of deposit, mutual fund, annuity, or other asset to fund a new portfolio and/or annuity may have tax consequences, early withdrawal penalties, or other costs and penalties as a result of the sale or liquidation. You cannot invest directly into a stock market index. Illustrations, projections, and hypothetical examples are used to explain concepts and are not indicative of potential results you could receive; past performance is no guarantee of future results; and results are not indicative of any particular investment or income tax situation; your results will be different and could be lower or higher. Insurance product features and benefits, such as guaranteed lifetime income riders, are subject to contract terms, limitations, fees, and the claims paying ability of the insurance company issuing the contract. Consult with a qualified investment, tax, legal, and/or retirement advisor before making any decisions.
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Investment Advisor Representative of and Advisory Services offered through Fiduciary Solutions, LLC, a Registered Investment Advisor. Peak Financial Freedom Group, LLC and Fiduciary Solutions, LLC are affiliated entities. Peak Financial Freedom Group provides no Advisory Services. Insurance products and services provided by independent agents. Jim Files CA Insurance License #0F06511 & Dan Ahmad CA Insurance License #0732913