I can’t verify it, but supposedly this is a true story of a radio exchange that took place off the coast of Newfoundland between the American aircraft carrier Abraham Lincoln and Canadian authorities:
Americans: Please divert your course 15 degrees to the north to avoid a collision.
Canadians: Recommend you divert YOUR course 15 degrees to the south to avoid collision.
Americans: This is the captain of a U.S. Navy ship. I say again, divert your course!
Canadians: No, I say again, you divert YOUR course.
Americans: This is the aircraft carrier USS Lincoln, the second-largest aircraft carrier in the Atlantic Fleet. We are accompanied by three destroyers, three cruisers and numerous support vessels.
I DEMAND that you change your course 15 degrees north, or countermeasures will be undertaken to ensure the safety of this ship.
Canadians: This is a lighthouse. Your call.
In my experience, people have some pretty dogmatic opinions on investing. But what if everything you thought you knew about investing turned out to be wrong?
That was the case for me years ago.
All my life I had been told these investment “truths:”
- you have to RISK money to MAKE money
- real estate doesn’t go down
- gold rises when markets fall
- stocks go up and down but they grow 10% a year on average
These are financial facts of life as preached by the denizens of Wall Street. But like the first facts of life I heard from Richie Silver in the 4th grade, these “facts” are more like rumors or myths. Except these myths can be dangerous, as the years 1998, 2002, 2008, etc., have taught us.
Perhaps the biggest Wall Street myth that continues to be perpetuated today is the concept of “average” returns. If X mutual fund increases by 50% one year and then decreases by 50% the next year, the mutual fund company is allowed to say that it “averaged” a 0% return.
But did it? Let’s do the math.
Imagine you have $1 million invested in X mutual fund. In year 1 your account grows 50% and you now have $1.5 million. In year 2 the fund tanks 50%, and your account falls to $750,000. The mutual fund company declares a 0% average return, but your account is down $250,000 or 25%. (This is one reason why we say that when you’re at or near retirement, a loss hurts a lot more than a gain helps. And why the sequence of returns can be as important as performance.)
Okay, now let’s imagine that the fund goes up 30% in year 3. At this point Wall Street is proclaiming that the fund averages an 10% return. A 10% return compounded over 3 years would turn a $1 million initial investment into $1,331,000. But on your real world account statement, your balance stands at $975,000 — $25,000 below where you started — and a far cry from $1,331,000.
This is 4th grade math – but few people ever do the calculation. Instead they accept the Wall Street myth that the stock market averages 10% returns.
The truth is, the only way to grow a dollar by 10 percent per year is to geometrically compound that dollar on itself.
And the only way to do that successfully is to avoid large losses.
If you’re not avoiding large losses – in other words, if you’re riding the Wall Street roller coaster up and down and up and down – than you’re not getting 10% a year growth. Or anything close to it. (I encourage you to do the math.)
Today’s fast-paced global economy requires more than a traditional “buy and hold” model for success. There are a number of proven strategies available to put a safety net under your savings and help you avoid the large losses that decimate a portfolio… and improve your overall returns.
Ask us about them.