“Stupid is as Stupid does.”
Forest Gump swept the Oscars in 1995, winning 6 Academy Awards, including Best Motion Picture. Forest was a fictional character with lots of character and fantastic karma. What Forest Gump lacked in intelligence, this simpleton more than made up for his low IQ with abundant common sense. In real life versus “reel” life, most baby boomers, gen x and millennials who are striving to save and invest for their retirement are mostly very intelligent. Baby boomers such as Bill Gates of Microsoft and Steve Jobs of Apple, Elon Musk of Tesla is a gen x-er and Mark Zuckerberg of Facebook leads the generation z, millennials.
Unfortunately, these three generations are less-than-bright when it comes to investing, according to a Wall Street Journal article on the research of Dalbar. Their findings consistently prove are that over the past 30 years all generations generally suck at investing intelligence. The return on investment is well below the US stock market, even though they took the same amount of risk. The stock market index as represented by the S&P 500, has returned 11.1% annually while the average investor in all United States Stock mutual funds earned a paltry 3.7% annually! The performance is about equal using the Dow Jones today as a proxy for the stock market.
Investors in stock mutual funds have seriously unperformed the market by 7.4% annually for three decades!
Even the best advisor with their best investment ideas are woefully misguided. This fact according to the well-respected research Dalbar, a financial-research firm in Boston that has updated this oft-cited study each year since 1994. How is that possible? Consider that the return of a market index like the Dow Jones today, is calculated as if an investor put their money into the index at a beginning point and keep it there, untouched, until the end of the measurement period. For example, one would invest say $10,000 on January 1st of any given year and left their money invested for the next five, ten or fifteen years and never touched their investment. But again in real life, most people put money in and take it out along the way due to the cost of living. So one might invest their recent bonus one year but then pulled their money out to use for making a housing down payment or paying tuition or withdrawing money for a multitude of miscellaneous reasons. Even if one invests the 401k max contribution each year, studies show that most are likely to borrow or withdraw from their 401k plan, if allowed to do so.
Making matters worse, most mutual funds (more than 80% of them) lag the performance S&P 500 index! Dalbar discovered that fees and expenses account for a large part of the performance deficiency. This is especially true in 401k plans where the average fee and expense cost can be 1.5% or more per year. Over a twenty year period this can add up to more than 30% of ones potential gains; but lost instead forever.
But the biggest factor for poor performance in the stock market game is emotional. Either fear or greed will drive baby boomers, generation x ers and gen z millennials to chase returns. They will consistently jump into a mutual fund after a streak of hot performance in the US stock market, only to discard it too soon when its performance goes bad. And historically, last years hot fund will be next years dog. Because of that buy-high, sell-low behavior, investors in a typical mutual fund have a lower average return than the fund itself. The better investing theory would be to buy last years poorest performing fund; as it will historically perform much better the following year. But can you imagine reviewing the performance returns of the mutual fund choices in your 401k, Roth IRA or retirement IRA and invest your hard-earned money into the worst performing mutual fund? Of course not; but historically and without fail, that strategy has returned much better performance.
Imagine a mutual fund as the Amtrak train that runs from Chicago to the San Francisco Bay Area. The California Zephyr traverses the entire 2,438 miles, but only the people who get on at the beginning of the trip and get off at the end will go the full distance. Some might get on in Des Moines, Iowa, and get off in Omaha, Neb., or Denver; others might board in Salt Lake City and stop in Reno, Nev., and so on. The train goes all the way, but not all the passengers do.
Likewise, a particular investment might earn 6% annually for 10 years, but only those people who held their investment in that investment for the full decade will match that return. A fortunate few might do even better if they luckily bought when the price of that investment was low and later sold high. However, in real life, most will do much worse. No traditional stock market investment will consistently grow say 7% each year. One year the investment will return hypothetically, 12% and then next year lose 5%. One must remain fully invested for a long period of time to realize the full potential of a specific investment. But our human nature will not allow us to follow this traditional buy and hold strategy in our personal finance discipline.
“In hot markets, money flows in,” says Ilia Dichev, an accounting professor at Emory University. “In down markets, people get scared and leave.
As a result, stock investors lagged behind the stock market itself by 1.3 percentage points annually between 1926 and 2002.
Further, according to research by Prof. Dichev, Even pension plans and other “sophisticated” hedge fund investors earn an average of at least three percentage points less than the hedge funds they buy. And several studies have shown that mutual funds outperform their own investors by between one and two percentage points annually.
The secret is out. According to research and facts on actual investor behavior, we are stupid when we invest our own money. Adding insult to injury, when investors in a mutual fund bail out, the fund manager must sell stocks to raise cash to pay the nervous Nelly investors who flee, any resulting capital-gains taxes will be paid exclusively by the investors who stay! This then results in those who do buy and hold get hit with phantom income taxes. That is taxes on money they did NOT receive. Adding to this problem is the phenomenal increase in stock market volatility since the year 2000. It is not uncommon for a stock market index to gain or lose 3-5% in a single day!
No wonder that most baby boomers and gen x -ers have opted to leverage their money by pouring more into real estate, typically their home. This is literally a ticking time bomb that will potentially explode and blow up their net worth in the future. Interest rates will eventually rise. It is not a matter of “if,” but “when.”Budgeting your money now to prepare for the worst is the best financial advice I ever received.
Fact: rising interest rates will crush real estate values.
And the cost of owning real estate is ever-increasing with nearly all cities and local municipalities raising local property taxes to pay for streets, schools, hospitals, police and fire departments. Federal income taxes will rise also to pay down US debt. A perfect storm is forming that could eclipse the financial crisis of 2008.
We all need to stop being stupid and seek the professional help and advice on alternative investment strategies that will;
1) protect your investments from going backwards or losing money and
2) guarantee that your income account that will provide income for your retirement will grow more than inflation and income taxes and
3) defer or avoid federal income tax.
There is s simple secret strategy that does exactly this. Studies prove time and again, that we suck at investing. Buying and holding the S&P 500 index over the past 16 years for example, has yielded less than 3% annually. After adjusting this measly return for inflation and taxes, most have lost purchasing power of their invested money. We recommend you follow how other very successful and intelligent wealthy invest their own money, in the best annuity available. Ben Bernanke, Suze Orman, Tony Robbins, Ken Lay and many, many more all use(d) this protected growth strategy that contractually guarantees your retirement portfolio will increase by as much as 7% annually. Even better, it will also provide you with a fully contractually guaranteed lifetime of monthly income. Imagine how your IRA, 401k rollover, investments and portfolio would benefit from this retirement planning strategy. It will also allow you the flexibility to maximize your social security benefits, assuming social security is still around when you retire and need it.
Michael Ham and My Money Track are happy to share with you and your local investment advisor or expert advice and information on this successful strategy. If you do not have a personal wealth advisor, or would like a second opinion on your financial plan, we are eager and willing to help. Even if you are a die-hard do-it-yourselfer, discount firms such as Vanguard and Charles Schwab offer these investments; but you will pay the exact same price for them as you would using a professional retirement planner or investment advisor. Learn money-saving tips and how to employ this powerful and market risk free strategy to turbo charge your retirement plan. 2016 is fast approaching and stock market valuations are at historically high levels. There is also a way to utilize this secret strategy that will provide you with a totally tax free retirement and tax free lifetime income. Pull your head out of the sand and admit that you suck at investing. Then reach out for our free help, advice and information that could put you and your family on easy street. You have nothing to lose except more money and sleep if you don’t call or contact us. Life truly is like a box of chocolates… you never know what you’ll get… unless you secure a proven contractually guaranteed, protected investment plan by a credit worthy financial institution. To receive your best advice on your best investment alternatives and “how much I need to retire,” all you have to do is simply ask. Even if you reside outside of our Dallas, Ft. Worth local service areas, we are happy to travel to meet with you. Call us today at 972-490-9400.