You can work your tail off, live below your means, save like a miser, invest like the experts, build a great retirement nest egg – and still end up with virtually nothing!
Don't take the bait!
The hypocrisy of some financial professionals isn't funny when you are talking about your life savings.
When I have discussions with licensed financial professionals, one of the first questions I ask is if they believe in diversification. The answer is emphatically “Yes!” Next question – “Why?”
I normally get an education about investing in non-correlated assets for protection. “Protection from what?”, I ask. The common answer is, “To protect from a catastrophic loss in your portfolio.” OK, so far….
I then ask about stop losses. I'd urge all readers to ask these questions to your financial advisor. While the answers vary; all too often they tell me not to worry, the market always comes back. They may produce graphs to prove their point, and the market does come back – eventually!
I'll then ask, “If the market suffers a 40% drop or more, can you guarantee it will come back in my lifetime?” No, they can't!
Here is what they leave out
NASDAQ.com tells us that on March 9, 2000 the NASDAQ set a new record – $5,046.86. The next time it set a new record was on May 27, 2015. In real numbers, it took 15 years to come back.
How was much buying power lost to inflation over that 15-year period?
The US Inflation Calculator gives us a better picture:
When adjusting for inflation, the buying power of Nasdaq recovered on January 11, 2018. On 3/31/2018 the Nasdaq closed at $7,063.44. While the Nasdaq briefly passed the previous (inflation-adjusted) high, today it has less buying power than 18 years ago.
The S&P 500 fared a little better. Reuters reports:
Once again, let's factor inflation into the picture:
When adjusted for inflation, it took almost 17 years (Dec. 2016), and a wild ride, for the S&P to recover the same buying power.
Some believe diversification, coupled with a commitment to buy and hold, is the ultimate protection. How many baby boomers would have the willpower to hang on while their portfolio drops almost 60% between 2000-2009? Can you afford to have your life savings remain stagnant for almost two decades?
