For the past two weeks the mainstream media’s year-end spin has been, “2011 was a break-even year for investors.” Break even? I don’t think so. Not even close.
As we start the new year it’s a good time to stop and look at the truth, and what to do about it.
When I told everyone to get out of the stock market at the end of 1999, the DOW was about 11,700, about the same as today. Inflation is up 30% since then and most investors underperform the market each year. Average mutual fund expenses are about 1.5% and about 95% of managed mutual funds fail to beat the overall market over a 10 year period.
Even if we said the average underperformance was only 2% per year, that’s another 25%+ over the last 12 years. This means that most investors lost about 6% last year and over 50% in real dollar terms over the last 12 years. Given that reality, it should come as no surprise that over 10 million baby boomers are now unable to retire.
The message I draw from both 2011 and as well as from the last 12 years is very clear. The stock market is no way the be-all and end-all it’s been sold to be, and the standard advice to invest for the long run has been and continues to be nothing more than an incredibly destructive myth.
2011 was not a break-even year, but it was actually a pivotal year. I will always remember 2011 as the year that my investment strategy that has served me so well for three decades, through all the market ups and downs, was permanently adjusted to take into account a new economic reality.
So, how do you successfully plan for a secure financial future? For openers, shift to an investment strategy that works in today’s world.
For decades I knew that the financial services industry’s standard advice of “always invest for the long run” was a terrible idea and instead followed the logical approach of buying at fair value or below and selling when a market (stock, real estate, etc.) became noticeably overpriced. While that strategy served me beautifully for a long time, I have become convinced over the last year or so that it will no longer work.
My new strategy goes like this: Now, rather than looking for a fairly priced market, I look for the market to be greatly underpriced, then I invest moderately and stay prepared to sell when it reaches or is close to fair value (about 14 times trailing earnings). Given all of the huge unresolved problems that exist in our economy– the Federal debt, the faltering Euro, the problems brewing in Japan and China, the weak job market, the housing market (which is NOT coming back for years, despite the desperate spin to the contrary) –I see this new strategy as the only profitable one going forward.
The other part of the strategy is that I also avoid having more than about 40% of my assets in the stock market at any given point and look to invest the rest elsewhere. Whenever we have a time, such as the one we’re in now, where I can’t find good alternate investments, I stay in cash and wait. When I do I lose a little money to inflation, but I’ve learned it’s a lot better to wait when the odds for success are poor, rather than risk losing a lot.
As you wait there are a number of actions to take to fill in the gaps left by low returns on investments.
- Eliminate all debt except a first mortgage.
- Save 15-20% of your income. (Advice for doing this is linked from my Spend Smart and Save More page. Also next week’s blog will address it head-on.)
- Invest in yourself; maybe start a business when the time is right (though probably not right now).
- Look to what you do, how you spend the time of your life as what matters and what will make you happy, not what you buy or own, not that car, that house, that prestige job. Simplify your life.
- No one, at the end of their life, ever wishes they’d made more money or owned more things. What they wish for is that they’d spent their time here better. Focus more on time well spent on the simple gratifying things that money can’t buy.
No one, at the end of their life, ever wishes they’d made more money or owned more things. What they wish for is that they’d spent their time here better.
In summary, the times have changed and to win we must also change, starting with some of the strategies and attitudes I’ve outlined above. When you do, I think you’ll be delighted at the results that will unfold over time. What you will see is that with a little common sense and a goodly amount of discipline you can usually control both your finances and your destiny.