Thursday, January 14, 2010

2009's Market Rally Is Turning You Into A Sucker

Every time you turn on the news, check the newspaper, or turn on your computer, one of the first things you hear is how much of a rally the stock market has had this month, quarter, or year. I can hear them on CNBC now, “the markets are on the rise…time to buy, buy, buy…forget about last year’s financial disaster, everyone smarter than a 5th grader is jumping back in and investing ALL their money!” Unfortunately, what most people DON’T realize is that even if the market does go up 25%-50% in a given year, if they don’t protect themselves from the downturns then they will never get ahead. In fact, chances are they’ll spend their retirement years working instead of…well, retiring (see “Retirees trading their golden years for the golden arches).

Here’s the math that you don’t see on the evening news or find in the Wall Street Journal. If you’re account lost 50% last year, it must make 100% JUST to recover and get you back to a break even. Most people think that if the market goes down 50% and then back up by 50%, they’ll be even again. Unfortunately, that is way off. Here is an example:

Account Value June, 2007: $100,000
Market Change June, 2008: -50%
Account Value June, 2008: $50,000
Market Change 2009: +50%
Account Value Dec, 2009 $75,000

How long does it take for the markets (or your account) to go up 100%? It certainly does not happen over the course of a year…or two…or five. If the market averages 10% per year, it will take 7 years to achieve 100% growth (the rule of 72. Look it up, it comes in handy). And what happens if 5 years into it, we see another drop of 25%-50%? Unless you guard against the market declines, you’ll never have enough money to retire. The market increases do nothing but lure suckers into investing all their hard-earned money into a system that statistically produces 80 losers for every 20 winners. I know what you’re thinking, YOU will be one of the 20 winners…o.k., if you say so. But let me ask you this, how has that worked for you so far? How has that worked for your parents, or your grandparents who are headed back into the job market because their retirement funds aren’t enough to pay the bills any more?

Don’t get caught up in the hype that the stock market is THE way – the ONLY way – to save for your retirement. It is ONE way to save and should be used for some of your savings, but only as one piece of your retirement puzzle – not EVERY piece! I know you’ve probably been listening to the Ramseys and Ormans of the world, but just because they say it on tv, that does not make it true. I’m not saying they are not smart people (don’t start bashing me yet, Ramseyites), I’m just saying they don’t know everything when it comes to investing.

If the stock market really isn’t the holy grail of retirement, but just one piece of your retirement puzzle, where else should you invest? The answer, a lot of places. Here’s a list of some places to consider. They may not be as sexy as the markets, but rich is better than sexy anyway when you’re turning 65 and leaving your job!
1. Municipal Bonds
2. Bond Funds
3. Investment Grade Life Insurance
4. Annuities
There are others, but these four are all good places to start. They are more defensive by nature, but still offer a lot of opportunity to earn good returns year in and year out to use when you retire. Besides, when your co-worker is crying in their cubicle next year because their account is down 25%, your 6% return for the year will be sounding pretty good. AND, you won’t have to sit around worrying about how your money is doing all the time. You could use that time to do other things, like enjoy life…or work to earn more money.
Talk to a local, professional advisor about your personal situation and find out what options are right for you. If you don’t yet have a professional you can talk to – or your’s decided to get out of the business after last year’s crash – give us a call. We’re always here to help.
What do you think? Are you diversifying and branching out to include other investment vehicles in your retirement plan? Leave your comments and stories below.

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