The Myth that House and Stocks Prices Always go up Exposed at last

The great self-funding retirement experiment using the current mutual fund model is over. It was based on the false premise that stocks always go up in the long run. It forgot the periods when it doesn’t. This also holds true for house prices which is the primary cause of the sub prime melt-down. Both myths have seen their demise at the same time and it hurts.

The financial guru’s said we should not worry even if the market goes down because on average it has returned 9-10% each year. I talk about the Flaw of Averages in my eBook and point you to websites that provide extremely useful information on the dangers of using averages in retirement.

If any financial planner talks to you about average returns, get up and walk away. They do not understand how the real world works for retirees living off their nest egg.

Self funded retirement depended on you giving your money to a financial planner who took a fee, then gave it to a WRAP (401(k) or IRA) Account manager who took a fee, who gave it to a fund manager who took a fee, who gave it to a broker who took a fee, and then to an administrator who took a fee, and to advertising agencies who took a fee. What was left was invested on your behalf.

This happened to superannuation funds, 401(k)’s and IRA’s. It makes no difference. They had a fee production line set up to keep paying themselves well for as long as they could or for as long as you put up with it. It worked well in the bull market and no one complained much. But in a bear market it hurts much more and is much more visible to you. Stop the fee production line now.

You might have made more money if you kept the fees and gave them the balance!

All this fee taking relied on the belief that markets always go up on average. Yes long term averages were used to convince you there would be enough money to grow your investments and pay all these parasites living off your hard earned money.

Two things they did not factor in are;

  • The fact the market goes down is not as significant as by how much it goes down.
  • the fact a market goes down is not as significant as how long it takes to recover.

You don’t need high level maths to work this out. Say the market goes down and you lose 50% of your money. Then assuming no fees, pension, inflation and taxes are taken out you will need a 100% return on what is left to just break even. That’s right people often don’t realise that a 50% loss requires a 100% gain to get back just the losses.

Add the time it takes to get it back and you have a recipe for disaster. Just using the industry infamous long term averages of 11% mean it will take about 10 years to recover from a loss of 50% of your nest egg. Can you live in retirement for 10 years relying on flawed long term averages to recover just your losses?

Remember these figures assume no fees, taxes, inflation or pension are deducted.

Jim Otar from Retirement Optimizer has a great article called, “The Time Value of Fluctuations” which all Baby Boomers should read. It is an easy read and he makes the point that any loss to your nest egg in the early years will seriously affect the survival of your nest egg.

Take a look at my report, “What if you retired in 2000What if you Retired in 2000 to get an idea of the problems of large losses to your retirement nest egg and how hard it is to recover the losses over time.

Wealth Managers relied on

  • The market always coming back and goes higher over the long term, but maybe not when you want to retire.
  • They didn’t factor in what your personal situation is and how the market activity could affect your retirement plans at that time. You live off your nest egg in the present – not in the long term. You only save for retirement over the long term.
  • They did not understand that taking serious losses early in your retirement can significantly affect your retirement nest egg. If they knew, they did not tell you.
  • They appear to have completely forgotten about the effect on your nest egg of taking a pension in down market years. Or maybe they didn’t want to say.
  • They appear to assume you would make good the losses in the short term from other income. Again they probably failed to tell you this at the time.
  • They didn’t tell you that you might have to work 3, 4 or 5 more years to make up for any losses. Yet another thing they might have forgotten to tell you.
  • All their calculations were based on average returns and possibly failed to include fees, taxes, inflation and pensions.

At best the financial industry has been unbelievably incompetent with your money by telling everyone the market always goes up but forgetting where you are on the long term up trend. Over 100 years it has gone up but there have been periods of many years when it went down or sideways. If you retire in one of those periods your nest egg would have taken a hit.

The wealth managers have been completely discredited but have used your money to make themselves wealthy. They continue to protect their income using your investments. This is shocking behaviour.

They should admit they failed and use their skills to find original, new and diversified ways to grow your investments that protect against the downside or at least minimise the risks and have a plan to exit the markets rather than lose your money.

Unfortunately when they created almost identical investment products investing in the same things they needed to convince you to buy and hold because, to do the rational thing and take your money out of  bad investments is just not possible, if everyone is doing the same thing.

If you didn’t know all this before, make sure you are fully informed going forward from here. There is nothing difficult about this. It just needs you to spend some time getting informed about how the numbers for retirement work and what is risky and what is safe. It’s having a plan that instructs your financial planner that you want your nest egg protected.

Right now things are bad and likely to get worse. If your nest egg is caught up in depressed mutual funds and equities you need to leave that money there unless it recovers to 10% or less. Just make sure you stop throwing good money after bad until world markets settle down. Putting money into banks paying 1-2%(USA) is better than throwing it into the mutual fund “black hole” and hoping it will help recover lost money.

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