It is only human nature that when the stock market keeps hitting new highs, we become fearful that it won’t last and we’ll see a nosedive in our portfolios.
Fear is normal at these times. Fear is a human emotion. But we can’t let fear rule and undermine a great, long-term investment strategy because the guy at the local bank is telling you they have a fool-proof “guaranteed” investment product where you can’t lose money. They may indeed have an investment product where you can’t lose money, but you may not make much money either, they just don’t tell you that part.
I guarantee if you take all your money out of your investment portfolio and bury it in the backyard you won’t ever lose a dime, but as time goes on that money will be worth less and less due to the effects of inflation.
When people become a little fearful, salespeople go to work. As do fraudsters, but I’ll get to that in a minute. I’ve been in the financial services industry for over 35 years now and, I promise, scare tactics do work but, unfortunately, they only work for the company selling the sub-par products, not the consumer.
There is no reason to fear investing in the stock market if you take a long-term approach. The stock market is supposed to go up and down. That’s what it does. But over the long haul the trend is upwards.
In fact, since 1926 the S&P 500 (the index that contains the 500 largest companies in the United States) has averaged a growth rate of 10% per year. But it hasn’t gotten those average returns without a few heart palpitations along the way.
I’m attaching a link at the bottom of this post to a short article that Dimensional Fund Advisors (DFA) published. This is the mutual fund company that I use to invest the stock portion of client portfolios. They have three Nobel Laureates on their advisory board so there is some real wisdom here, not sales hype. In this article, you will see a chart that lays out the returns for each and every year since 1926. There have been some years with huge gains, and some with huge losses, but overall, had you been invested the whole time, you would have averaged 10% per year.
To make things easier on your heart and give you a smoother ride we don’t just invest in the S&P 500. We invest your money all over the globe which does two things for you. First, it reduces the ups and downs in your portfolio because not all your money is in the United States stock market. International stocks and real estate are often up when the U.S. markets are down and vice-versa so you don’t get the wild swings in returns that you would have had you been invested only in the S&P 500. And, second, we have the opportunity for enhanced returns because there is a lot of money being made by companies that reside outside the United States. (Think Sony, Samsung, Mitsubishi, Panasonic — all foreign companies.)
I also want to caution you about fraud. Financial fraud is more prevalent these days than ever. And it’s coming in the form of promised, high investment returns. Think Bernie Madoff. It seems these guys are everywhere. I just read an article about a friend of mine who has been a writer in our industry for decades who got bilked out of almost $1 million from a Midwest, nice-guy, real estate developer. His article about his experience was gut-wrenching. He’s a very intelligent man. I know him personally and he has a heart as big as they come. His long-time accountant recommended this developer to invest with, with the promise of big returns, and he lost everything. And so did his mom.
The red flags were there — promised returns that were too good to be true; a slimy sales approach from the developer. And after writing out his big investment checks my friend was issued promissory notes (big red flag) that “promised” returns approaching 18% on his investments.
I write about this today because these guys seem to be everywhere. A former boss of mine did seven years in prison for a similar scheme, also involving promissory notes.
You know the old adage — if it seems too good to be true it probably is. Well, I’m here to tell you, if someone is “promising” you 18% returns per year, run for the hills. If these were great investments, everyone would have their money in these deals. They don’t because they aren’t. They are sophisticated schemes that can bilk you out of your life savings.
To a lesser degree that doesn’t rise to the level of fraud is the unethical sales practices of products that are not in your best interest. Again, if they seem too good to be true, most certainly they are. Bankers and brokers are not required to sell products that are in your best interests like fee-only financial planners are, so buyer beware. I mention this because as many or more unscrupulous sales practices are happening today in the financial services industry as ever. We are even seeing mortgages sold, again, to people who can’t afford them. This all spells trouble, and I don’t want that trouble happening to you!
You should know that all of my money is invested in the same exact strategies that I recommend for my clients. And over the decades that I’ve been investing, these strategies have worked extremely well. Yes, there have been years when I had less on paper than I did the year before, but the majority of the time (about 2/3 of the time, in fact) my money has grown and grown well.
And, more importantly, I sleep well at night.
My personal belief is that our stock market has room to grow. It always has and always will. New companies go public all the time, and those companies grow. Existing companies like Microsoft, Apple, Facebook, and Google, keep growing, and if this tax act passes, most likely you will see stock prices rise. While I’m not too thrilled with a lot of what’s in this latest tax legislation, if the corporate rate drops from 35% to 20% large company profits will go up and most stock prices should rise. Also, our economy is growing, unemployment is down, and public confidence is up which are always good indicators of what stocks are going to do.
However, with all that said, we do have risks out there. North Korea, the investigation into Russian collusion, Mideast instability, sexual harassment scandals affecting company’s bottom lines (nothing has come out yet about Wall Street firms but don’t be surprised when it does — another reason I use DFA Funds as they are NOT a Wall Street Firm and never have been), and any number of other surprises that may be on the horizon.
There are always risks when it comes to investing, but being globally and widely diversified is our number one way to protect against these risks.
So don’t let fear win.
I want to close this article with a little levity from a brilliant colleague of mine who died unexpectedly last year. He was a visionary and esteemed leader of the financial life planning movement. When it comes to becoming financially successful he always said there are just three things you need to know — “Spend less, save more, and don’t do anything stupid.” Thanks, Dick Wagner. Wise words.
(Here’s the link to the article I mentioned above: https://s3.amazonaws.com/JATAJ/JWM+Client+Articles/the+uncommon+average.pdf)