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Richard Berger
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Mr. Berger is the creator and developer of the YDP screening tool. A chart system and its analysis for screening and monitoring dividend income equity investments. Seeking Alpha's #3 ranked Author for Income Investing Strategy & #4 for Utilities. A former Chief Operating Officer, Director,... More
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  • All The Professional Investment Advisors Got It Wrong! 3 comments
    Jan 28, 2013 10:44 AM

    The most important investment advice I ever received is "Never lose any money!"

    Yes, that may sound simple and silly, but it is sage advice if you think carefully about it and the value of compound growth and the future value of a current dollar. A dollar lost today is far more than a dollar. Lets look ....

    The almost universal consensus among Professional Investment Advisors is that as you near retirement you should shift your portfolio allocation to more and more conservative holdings. This advice is based upon the reasoning that you have less time to recover from an adverse event since you are at or near retirement and thus the loss will not have time to recover. In my capacity as a petroleum exploration and development geologist and Chief Operating Officer of Oil and Gas for a Fortune 200 scale company. Risk management is NOT the same as risk aversion. Far more goes into the decisions and choices of portfolio management.

    Reasoning by financial managers ignores two very important facts, A) the value of compound earnings and B) that even at retirement, the typical investment horizon remains another 25 years and thus allows time to recover from market volatility as much as at any other investing time.

    The long term compound annual growth rate for the S&P 500 index is 9.34 %. In plain English, this means that historically an investment has doubled about once every 8 years. Thus an investor starting out with $1 invested at age 18 will find that 50 years later they have $86.89 at retirement age of 67 if they do nothing more than simply let that $1 sit and compound at historic rates.

    Now, if our investor is frugal and disciplined and invests an Additional $1 each year, the results are $ 1,006.44 awaiting them at retirement.

    If we crank the contributions up to the very reasonable budget of lets say $ 1,000 per year then our investor has a few dollars over $1 million ($1,006,444.93) to enjoy at the start of retirement. Keep in mind, this is the average compounded return, including good markets and bad, bubbles and crashes. The 9% annual rate of return holds for periods of 15 years and longer. Shorter periods show greater volatility in both directions. However, even the retired (post 67 year old) investor still can be expected to be around into their 90s these days and much of their investment still working and compounding for them. Thus even at 67, a very large part of the retiree's total portfolio continues to enjoy a 15 year plus window and the anticipated 9% + average returns.

    In fact, The Pro's got it 100% backwards. It is not when you retire that you should be more conservative with your investments. No! It is when you are young! As shown above, that $1 invested at 18 will be $87.00 !!!! So, every $1 dollar they lose at age 18 is really like losing $87 dollars at age 67. Yes, you must be 87 times more cautious at age 18 than at age 67. and 174 times more cautious than at age 75, and 348 times more cautious than at age 83. Goodness, at age 91 you can take on 696 times more risk as you did at age 18 and still have the same net risk result as having lost $1 at age 18!!!!

    S&P 500 Total annual returns

     

     

     

    YearAnnual
    Return
    $1.00 Investment
    at the start of '88
    Gives
    5 Year
    Annualized Return
    (g/i)=(1+ar)^5
    10 Year
    Annualized Return
    (g/i)=(1+ar)^10
    15 Year
    Annualized Return
    (g/i)=(1+ar)^15
    198816.61%$1.17---
    198931.69%$1.54---
    1990−3.10%$1.49---
    199130.47%$1.94---
    19927.62%$2.0915.89%--
    199310.08%$2.3014.55%--
    19941.32%$2.338.70%--
    199537.58%$3.2116.59%--
    199622.96%$3.9415.22%--
    199733.36%$5.2620.27%18.05%-
    199828.58%$6.7624.06%19.21%-
    199921.04%$8.1828.56%18.21%-
    2000−9.10%$7.4418.33%17.46%-
    2001−11.89%$6.5510.70%12.94%-
    2002−22.10%$5.10−0.59%9.34%11.47%
    200328.69%$6.57−0.57%11.07%12.19%
    200410.88%$7.28−2.30%12.07%10.91%
    20054.91%$7.640.54%9.07%11.51%
    200615.79%$8.856.19%8.42%10.65%
    20075.49%$9.3312.83%5.91%10.48%
    2008−37.00%$5.88−2.19%−1.38%6.46%
    200926.46%$7.26−0.06%−1.19%7.87%
    201015.06%$8.351.80%1.16%6.58%
    20112.05%$8.52−0.75%2.67%5.28%
    201216.00%$9.88   
    High37.58% 28.56%19.21%12.12%
    Low−37.00% −2.30%−1.38%5.28%
    CAGR9.34%    
    Median12.97%   10.92%

    (from http://en.wikipedia.org/wiki/S%26P_500 )

    There are indeed risk and volatility management options that every investor needs to consider for their retirement portfolio at various points along the path, especially as you approach the year of retirement when new contributions to the funding may stop or curtail for many investors and withdrawals (income sourcing) begin. I will discuss some of these in my next article.

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Comments (3)
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  • Yield Hunter
    , contributor
    Comments (294) | Send Message
     
    As a 27 year old, this is eye opening, and I appreciate you laying this out. Just a few weeks ago, I was talking to my father about investing a small sum for my children (ages 3 and 1.5). He said I should just put in something safe and let it sit for the next 20 years before even looking at it. My response was that commonly accepted investing "wisdom" is to play more aggressively because of the long term horizon. Well, after reading this (and a few other articles over these last few weeks of the power of DGI), I'm glad I didn't get my hands on those funds yet (a relative left them a gift in his will that has not yet been distributed)! Thank you!
    4 Feb 2013, 12:47 PM Reply Like
  • Richard Berger
    , contributor
    Comments (928) | Send Message
     
    Author’s reply » I'm glad I was able to provide food for thought to you.
    Thank you for your comments. Good luck with your investing.
    4 Feb 2013, 01:18 PM Reply Like
  • Artbr549
    , contributor
    Comments (37) | Send Message
     
    Great article Richard and good timing for me, as i have just opened a trading account for my 3 year old grandson. I have been pondering what to buy for it for the long term. It is only a couple of thousand dollars but is a start to gradually add to. Any ideas would be appreciated.
    Thanks again for the article.
    23 Feb 2013, 02:32 PM Reply Like
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