Dear Natalie,

The Dow Jones Industrial Average return was 7.0% since January 2000 with dividends reinvested, or 197% total return. So, Buy and Hold did work. It was just gut-wrenching. Is there something that I’m missing here? I had a hard time with the markets for too many years which ultimately affected my current financial position. And although I understand “the markets” and the whole financial system way better now, I remain ….

Gun Shy

Dear Smart to Be Gun Shy,

DJ Javy Union. Photo by Isabella Secus. (c) 2015. Wiki Commons. Used with permission.

You can still ride a horse from LA to NYC. However, that doesn’t mean that it “works.”

It’s not just gut-wrenching when you lose more than half of your assets. It can wipe you out, prevent you from retiring, throw your credit score in the toilet, make you borrow at higher interest rates and affect your health. When someone loses more than half of their assets and retirement, this is not a math problem. It’s a life problem. I have seen far too many foreclosures, short sales, bankruptcies, deaths and even suicides to believe that you should buy into this very misleading statistic.

When you lose 55% of your retirement (as the Dow Jones Industrial Average did during the Great Recession), it doesn’t recover at the same rate as the market. When you lose more than half, you are now earning gains on that much lower amount.

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Between 2009 and 2018, the S&P500 rose to 2,506.35, from 903.25 (with a low of 676.53 on March 9, 2009). That equals a gain of 277% total, or 27.7% annualized over the 10-year period. This is just the gain of the market, not including dividends. However, the gain of your nest egg over that same 10-year period, including dividends, is still only 54.4%. That equals a gain of 5.44% annualized. Most of that decade would have been hell, and you’d be lucky to still own your own home.So, the annualized gain of the market does not come close to reflecting the real world. “Lies, damned lies and statistics,” Mark Twain.

It took the NASDAQ Composite Index 15 years to crawl back to even. The Dow did fare better in that recession. However, as is human nature, there were a lot of people buying into the “New Economy” who were overweighted in Dot Com stocks. They watched in horror as the index lost 78% of its value between 2000 and 2000. Most Americans (and Canadians) have only slightly more money in retirement today using Buy & Hold than they did in 2000. Most of the increases would be contributions.

On the other hand. If you were using my pie chart system, your losses could have been limited to 25% or less. On Dec. 24, 2007, I warned investors that the coming downturn was going to be nasty, and suggested overweighting 20% safe. So, the average 50 year-old would have had 30% at risk and would have lost about 17%.

Again, many people were so horrified at the losses in 2009 that they sold low and went to cash at the bottom. No one who used my pie chart system was tempted to make that colossal mistake. In fact, our office received quite a large number of messages of gratitude. Click to watch Nilo Bolden’s testimonial.

What lies, damned lies and statistics are people buying into today? Actually, a lot of people are twice burned and wise. The real reason that the Dow Jones Industrial Average is trading so high is due to corporate buybacks. Companies can borrow money very cheaply, repurchase their own stock and make their earnings per share look stronger than it really is. It’s like bait in the water that the unsuspecting are supposed to snatch up. However, most of us live in the real world and we can see very clearly that no one in our circle of friends is better off financially today than they were twenty years ago.

One other problem with Buy & Hold is that the closer you get to retirement, the less you are able to wait out a decade of hell. In theory, that is easily solved by keeping enough safe in bonds. However, there are many problems with that idea in today’s world. I’ve included just a few below.

The Difficulty of Getting Safe in an Over-Leveraged World

  1. Most people don’t have enough safe. (I’ve been doing a lot of 2nd opinions, so I’m keenly aware of this.)
  2. Bonds lost money last year.
  3. Over 50% of investment grade corporate bonds are just one rung above junk bond status.
  4. Many bond funds have up to 20% of junk bonds in them.
  5. Annuities are not FDIC-insured. They are only backed by the insurance company who sold it to you.
  6. Insurance companies are vulnerable to market downturns. They are even more exposed to the high levels of risk in the bond markets than banks are.
  7. Money market funds have redemption gates and liquidity fees. You’re going to be charged to have access to your money, if you can get it at all, if the bank or financial firm underwriting the MM fund gets into financial trouble.

The Bottom Line
Buy and Hold worked just fine between 1970 and 2000. However, since 2000, we’ve had two recessions that look more like Great Depressions. The world is over-leveraged, drowning in debt, and using low interest rates to create asset bubbles. Buy and Hold does not work in a stagflation economy. Modern Portfolio Theory with Annual Rebalancing works great, provided you know what’s safe in a world where stocks, bonds and real estate are all in bubbles.

Getting your financial plan from a salesman is as bad an idea as…

  • Letting the realtor decide which home you can afford to buy
  • Letting the bank or debt collector craft your budget around debt payments
  • Letting the car salesman sell you the biggest car on the lot

Wisdom is the cure. It’s time to learn and master the ABCs of Money that we all should have received in high school.

If you’d like to learn time-proven strategies that earned gains in the last two recessions and have outperformed the bull markets in between, join me at my Wild West Investor Educational Retreat this Oct. 19-21, 2019. Click on the flyer link below for additional information, including the 15+ things you’ll learn and VIP testimonials. Call 310-430-2397 to learn more. Register by July 31, 2019 to receive the best price. 

Article originally posted on nataliepace.com
Natalie Wynne Pace is the co-creator of the Earth Gratitude project and the author of the Amazon bestsellers The Gratitude GameThe ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street). She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical).

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