Volatility is So Not Your Friend

Volatility

Your financial advisor says, “Don’t look at your stock market portfolio every day.  It’s not good for your health.  Stocks always go up and down.  Rather, look at it once a year.” 

Really?  Just once a year?  Why would he say this?  Because even if you looked at it more frequently, you might not know what changes to make anyway.

Also, he knows that too many negative changes in your portfolio may make you nervous and even worse, want to change advisors! 

You’ll hear, “Don’t divert from your goal; volatility gives you the opportunity to buy low and sell high! The stock market will recover; it always does.”  Sound familiar?

Volatility is the HUGE elephant in the room.  It is defined as large swings in market price or value.  It is a major concern because it disturbs continuous cash growth. Volatility can take the values of our investments to insanely high levels and then crazy low levels, potentially all within a week.  Then we’d need to wait to recover.

But how long will that recovery take; do you have the time to wait?  And wait to recover to which level? The insanely high one you tasted for a day but didn’t sell because “It will go higher?”  Such stress and pressure we put on ourselves!

During the “accumulation phase” of your life, when you are building up your retirement account, volatility is severely damaging to continuous growth.  Regardless, we get used to the ups and downs, and we think we have time.  But drops in value require “recovery” over time. Some advisors would have us believe those drops in value are unavoidable, and not a big issue. Huh!

When we retire, we enter the “distribution phase”. Accumulation was tough, as we had to stomach losses and struggle to try to achieve desired results, and that was stressful enough. The distribution phase is even tougher; it is a part of our lives when we do not have the opportunity to continue working to put more money aside.

Imagine you are 82 and the value of your investments just dropped by 34%, as occurred in 2008.

How would you feel about that?  Would it affect your ability to pay your bills?  Would it cause undue stress?  Would it shorten your life?

“But your portfolio is averaging 5%!” your advisor claims.  Oh no!  That’s just another one of those poorly understood words, which makes you feel that your money is smoothly growing.  The problem is that it doesn’t smooth anything out; it just disguises the problem even further:  volatility destroys compounding and growth

If you would like to schedule a time to discuss your financial needs including volatility in your portfolio, we ask you to please take our “2 – Minute Survey” linked below. This will allow us to understand your needs and put you on the path to Financial Success. Upon completion of the survey, our team will follow up with you to review your specific Financial Goals.

All whole life insurance guarantees are based on the claims-paying ability of the insurer. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. Dividends reflect profits and are not guaranteed.

Question Conventional Math: Misused Words

Jack walks into his financial advisor’s office and asks how his portfolio is doing. “Well, says the advisor, you’re up 60%!”  A year later, in the same office, with the same question, Jack is told he’s down 50% for that 2nd year. Jack says “so +60% – 50% = 10%, divided by 2 (years) = 5% average return.  “Okay, not too bad…”

Sarah walks into her financial advisor’s office and asks how to best invest $100,000. The advisor suggests some investment opportunities and they examine one that looks interesting. To explain the value, the advisor says “Over the last 25 years, the average return of this has been 7.34%…so, looking forward, using 7.34%…wait, let’s be conservative and use 6.34%…so, in 30 years, you would have $632,265.78!” Sarah certainly liked that number.

Harry, a 22-year-old in his first job, is told that he is being automatically enrolled in the 401(k) program.  To encourage participation, the conversation goes like this: “How old are you? 22? When do you think you’ll retire? 65? Okay…43 years, and you’re going to contribute $212 per paycheck.  The stock market has returned 7% over the last 25 years, so, using that, at age 65 you’ll have over $1,300,000!  How does that sound?”  Harry was thrilled.

At the end of their projected time periods, 30 and 40 years respectively, their numbers fell far short.  Why?

Because of the misinterpretation and misuse of the words “average,” “change,” “return,” and “straight-line projections.”  They are deceptively utilized, especially with your hard-earned dollars. 

For example, in the first scenario, if Jack invests $100 and it goes up 60% in year one, he has $160.  If it goes down 50% in year two, he loses $80 (50% of $160 = $80). Therefore, Jack has just $80 left.  He may be up 5% on average, but his account value is down 20%!  Here, using the word “average” is completely misleading.  There is no direct correlation between an average over the years vs. the actual dollar amount left in your account.

In the next two scenarios, only straight-line projections are used (“if you get 6.34% every year…”).  Has there been any time when the market was up exactly 6.34% for even just 2 years in a row?  No.  There is a critical part missing to the equation:

Volatility of the markets. 

Ignoring volatility both historically and with future projections causes actual dollar results to fall far short of expectations.

Think of it this way:  If you retired with a $1,000,000 portfolio in December 2000 and took $40,000 each year (a 4% drawdown) to pay your bills, how would you have felt paying $40,000 in the year when the market tumbled 34% in 2008 and your portfolio was only worth $660,000?  Neither the “historical average” nor the “straight-line projection” would help pay those bills, would they?  How long would it take to get back to $1,000,000, if ever?

“Average,” “change,” “return,” “straight-line projections,” and “volatility” are all poorly understood, even by the pros.  More to come about each of these…

Friends and family members that you refer to The Finance Fixer will receive a free copy of Pamela Yellen’s New York Times Best-Selling Book, “The Bank on Yourself Revolution” and her CD titled “How to Grow and Protect Your Wealth.”

Everyone has 20/20 Hindsight

Everyone has 20/20 Hindsight

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                             

         What has your hindsight taught you about money, spending, saving, wealth accumulation, and retirement planning?

 

Your current financial status is based on the financial choices you made many years ago.  Some were good; some not so good. 

Now, with your 20/20 hindsight, what would you tell your children or grandchildren to do?

What do you wish someone had convinced you to do when you were younger? 

Would you have listened?  Probably not.  Because in general, young people:

  • Feel immortal
  • Need to experience life for themselves (don’t listen to others)
  • Believe they “have time”

Does this remind you of yourself when you were young?

If you were able to travel back in time and give yourself advice, what would that advice be?

Here is my advice to a young me:

1)  Question conventional math.

How is it possible that industry-stated returns (for example, 5%) match my expectations, but my ending dollar balance is not as expected?  Do the math.

2)  Question conventional wisdom.

The financial industry has us accustomed to accepting too much risk, has us believe mutual funds are the answer, touts 401(k)s, and has fees everywhere in their products (hidden and open).  Look for safe, secure, consistency of growth leading up to and through retirement.

3)  Question your peers’ advice.

Peers tend to hail their wins and forget their losses.  Talk to many peers and learn to separate the wheat from the chaff.  Investigate; do your homework.

4)  If your financial advisor states, “Don’t worry, you have plenty of time!” get a new advisor.

Your goal should be to find consistent, reasonable returns.  Volatility is not your friend; it destroys compounding.

5)  Don’t ignore or neglect tested, proven, and traditional financial vehicles. 

Whole Life insurance, CD’s, savings bonds, etc. have their place. New and shiny (and well-marketed) is not always a good fit.

6)  Plan for the worst; hope for the best. 

No matter what happens in life, do your best to provide a certain and secure positive financial outcome.  Life’s events will take a toll on the best of plans. Disability Income insurance, Whole Life insurance, and Long-Term Care insurance can contribute significantly to outcomes.

Stay tuned…more details will be provided in future posts.

The Finance Fixer is uniquely focused on strategies to provide certainty and guarantees for your financial well-being.  We concentrate on your personal situation to help you make the best choices for you and your family. 

If you would like to schedule a time to discuss your financial needs we ask you to please take our “2 – Minute Survey” linked below. This will allow us to understand your needs and put you on the path to Financial Success. Upon completion of the survey, our team will follow up with you to review your specific Financial Goals.

Friends and family members that you refer to The Finance Fixer will receive a free copy of Pamela Yellen’s New York Times Best-Selling Book, “The Bank on Yourself Revolution” and her CD titled “How to Grow and Protect Your Wealth.”

All whole life insurance guarantees are based on the claims-paying ability of the insurer. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. Dividends reflect profits and are not guaranteed.

See The Top 5 Whole Life Policy Advantages

5 of our top advantages that High Cash Value, Dividend-Paying Whole Life Policies can provide.

There is a chance that you might have heard the old joke where a man hears a knock on the door. He goes to the door to find a man with an IRS badge held out in his hand, and a smile on his face.

The homeowner says, “Hello, how can I help you?” filled with dread as to what his visitor could possibly say next.

The visitor says, “Hello good sir! I’m an agent from the IRS, and I am here to help you with your tax and finance situation.”

You may have had a good laugh at that little joke, but the reality is that there are some instances in which the IRS is, in fact, trying to help you with your current financial situation

Keep in mind, I am not a certified public accountant and don’t pretend to be one in public or on the internet, but there are five ways that a High Cash Value, Dividend-Paying Whole Life Policy and The Finance Fixer can help you potentially save thousands, tens of thousands or even hundreds of thousands of dollars over the course of your life.

Here are 5 of our top advantages that High Cash Value, Dividend-Paying Whole Life Policies can provide.

1) Retirement Savings Withdrawals that Are Tax-Free

The tax rates are going up over time, which is why you may be better off paying your taxes up front, while you know what the rate is. This will allow you to keep more in the long run, and will help you save a lot of money on your taxes.

2) Cut the Taxes that You will Pay on SS Benefits

This can be misleading. Don’t think that just because you have your own 401(K) or IRA that the government can’t get your money. What you take in from the High Cash Value, Dividend-Paying Whole Life Policy will not be included in what the IRS includes in how much your social security is going to be taxed.

3) Get More Federal Student Financial Aid

The money in your High Cash Value, Dividend-Paying Whole Life Policy will not count against you when your kids are applying for aid from the government. This may qualify them for more federal financial aid.

4) Business Expenses

When you finance expenses for your business through your High Cash Value, Dividend-Paying Whole Life policy, this is a great way to some tax deductions for depreciation and interest.

5) The Death Benefit

The death benefit of this type of account gives you the ability to increase the value of your account exponentially, and gives you the ability to leave your loved ones income that is tax free.

Thank you for being a member of The Finance Fixer Community

All whole life insurance guarantees are based on the claims-paying ability of the insurer. Excess policy loans can result in termination of a policy. A policy that lapses or is surrendered can potentially result in tax consequences. Dividends reflect profits and are not guaranteed.