Apr 10
11
How do Successful Investors Invest for Retirement?
First, let me say that everybody is different based on his or her individual situation, including investment experience, investment goals, investment time horizons, risk tolerance, and personal preferences ECT. Therefore, this is not an article to recommend a particular stock, mutual fund, bond or commodity. However, I would like to discuss principles and attitudes toward investing and look at some results that have recently transpired, as well as looking toward the future and the need for changes in our attitudes toward investing in order to continue to prosper.
First, let us look at the principle of Risk vs. Return. Investments that offer very little market risk will also provide very little return on the investment; notice the terminology “market risk” does not indicate there is no risk at all. For instance in the case of CD’s, Money Market accounts and other fixed accounts there may be very little market risk, but since they provide a low rate of return the may have inflation risk. Meaning the money will grow at a pace that does not keep up with inflation, (you are losing purchasing power). Whereas investments that provide the opportunity for higher rates of returns may provide a higher potential to lose money.
Now let us look at the principle of economic or market cycles. Economic or market cycles occur as an economy expands or retracts also referred to as upturns and downturns in the economy. Different types of investments or different asset classes react differently during these market cycles or upturns and downturns. No one can exactly predict when a market cycle is going to change or turn, and since different asset classes or different types of investments react differently during different market cycles, an investment that is providing a good return during a particular market cycle can also bring a loss when that market cycle changes.
One defense against changes in market cycles is diversification in the investment portfolio. Meaning the investments are spread out among different asset classes or different investment types that react differently during different stages of market cycles. Therefore, while some investments or asset classes may react poorly during a particular stage in the market cycle other investments may be doing very well. In addition, this can act as a hedge against losses during changes in market cycles.
Note: mutual funds are not asset classes, many times people think that because they chose different mutual funds for their investment portfolio, they believe they have diversified their investments and minimized risk. This could not be further from the truth. Mutual funds invest in different asset classes usually weighing more heavily in one direction or another, when evaluating someone’s investment portfolio it is very common to find that they have chosen a group of mutual funds that all lean toward one direction or another exposing them to enormous risk if the market cycles were to suddenly change.
Another defense against defense against changing economic or market cycles is utilizing options to hedge or protect investments in an investment portfolio. Options can provide either a short position, meaning you make money when a particular investment or index drops in value or a long position, meaning a particular investment or index goes up in value.
Note: we are only providing enough for a basic understanding of these concepts in order to set the foundation for this article. Enormous amounts of time could be spent teaching these subjects (risk, economic cycles, diversification, and options hedging against risk).
In the past 20 years or more, following smart investment principles and investing for the long term has provided some strong portfolio growth for investors. Many high net worth investors have done exceptionally well until recently when the market took an enormous hit, that has been compared to by many as approaching the stock market crash of 1929 that preceded the great depression. This is further illustrated by looking at the investment strategies of the elite and very wealthy. Take for instance large endowments like that of the Harvard University endowment that until recently their sophisticated investment models which spread their investments out over many different asset classes made it the biggest and best-performing endowment of any major US college. However, by June 30 2009, the Harvard University’s endowment was down more than any other college endowment in the US; their investment losses totaled 27% with Yale University down 26.8% and the average university endowments were down by 23%. While these endowments fared better than the average 401k investor which by some estimates were down 40% or more, the losses to these endowments are staggering. While many financial professional and media gurus are still calling this a downturn in the economy or just another change in market cycles to be followed by an upturn in the economy, There are also some very credible economist and market analyst that are saying the very opposite, that the worst is yet to come.
David Weidemer, Robert A. Weidemer and Cindy Spitzer are the authors of two books that paint a grim picture for the financial future for the US and the global economy. Their 1st book published in 2006 “Americas Bubble Economy” identified 6 market bubbles (real estate, private debt, discretionary spending the stock market, US Dollar and government debt). They went to say that four bubbles would begin to pop first (real estate, private debt, discretionary spending and the stock market) which against all the popular financial analyst and media guru cheerleading occurred as they stated in 2008. Now with their second book Aftershock “Protect Yourself and Profit in the next Global Financial Meltdown” They show how the next two bubbles (US Dollar and government debt) will pop and bring all 6 bubbles down, creating a market crash much worse than that of 1929. They also show that due to the heavy reliance of foreign investment something we did not have 30 years ago, this will not act as a market cycle going up just as it went down, but will take much longer to correct. The good news is that they give some sound advice for protecting your assets and prospering during this time.
The answer to the title of this article “How Do Successful Investors, Invest for Their Retirement?” is to prepare for the worst and position yourself to prosper during any market turmoil.
We provide financial service in Southern California in and around Orange County CA. Please Contact Us if you would like more information on how you can protect your assets and prosper while riding through a financial storm.
Your Life Advisors
Dean Barwick / Manager (714) 380-4586