Many of us are now assessing the damage to our retirement accounts in the wake of last two economic crises. We first had the Dot Com bubble burst in 2000 and now the Mortgage debacle of 2007. For many the assessment is far too bleak. Even though the last 12 months have been better, the recovery of our personal retirement accounts doesn't seem to be as fast as the banker's bonuses. We think the problem is the Buy & Hold retirement strategy promoted by many.
Here's what the average person does with their 401k retirement account.
- First you decided to commit a percentage of your salary to retirement every pay period; a very wise decision.
- Next you decided how to invest that money. You might have followed an asset allocation plan. (Another wise decision). Or you might have just selected a few funds from those available with the highest 5 year returns. (Not so wise)
- Next, papers were signed and the money automatically flowed into your 401k account. You probably then focused on your job and life while your 401k chugged along. You didn't think too much about your 401k because you were taught to Buy & Hold. You are told not to "play" the markets but to let the professional fund managers do that for you. So, you trusted them to manage your money and in fact paid them on average 1.3% of your retirement account every year to do just that! So, you relaxed, trusted your money managers, and forgot about your 401k.
- Then the Dot Com bubble burst in 2000. You didn't worry too much even though the press kept telling you the sky was falling and the end is near. Then as your 401k statements arrived you watched the last ten years of gains quickly evaporate. You might have even called your 401k adviser who told you not to worry. "The markets go through these up-down cycles all the time. Just wait and it will all get better."
- Just when it started to look OK again the 2007 Mortgage Meltdown happened. The first crisis took two years or so but this one happened fast. In less than a year your retirement investments returned to their mid-1990 values. You wonder what your professional money mangers have been doing.
- Reality sets in! You're not retiring in five years like you planned; maybe not even in ten because you no longer have enough in your 401k account. This scenario didn't have to happen! Avoiding the Buy & Hold strategy could have preserved most of your gains.
Most retirement investors don't realize how much they give back when they practice a Buy & Hold strategy. Here are some numbers. If you had invested money in an S&P 500 Index fund in January, 1993 and left it there for the next 17 years your investment would have gained about 260%. On the other hand, if you had traded only 4 times, moving between the index fund and a bond fund during those 17 years you could have earned over 800%. That's 540% that you either gave back or kept depending on which strategy you followed. The alternative to a Buy & Hold strategy is extremely easy to follow. Here it is in its simplest form.
- Decide how much to invest each pay period
- Choose a index based stock fund and an index based bond fund from those available to you
- When the stock market is in an upward trend then buy the stock fund; if not then buy the bond fund
- When the trend of the stock market reverses then reverse your investments
- If you are invested in stocks and the stock market enters a downward trend sell the stock shares and buy bond shares
- If you are invested in bonds and the stock market enters an upward trend sell the bond shares and buy stock shares
Many will scoff and say, "If I could predict what the markets were going to do I wouldn't be worrying about retirement." If that's what you're thinking you've missed the point. Understand clearly we are not talking about predicting the future. We're simply saying, "Recognize and act on the current, long term trend." Economists identify these trends all the time using common economic data and computers. Be clear that they are NOT predicting where the market is heading BEFORE it goes there. All they are doing is recognizing an existing long term trend as early as possible, not predicting it before it happens. As the example above illustrates these trends change very slowly and infrequently yet can make huge differences in your retirement plans. The frequency of the signals is a sensitive indicator of whether or not someone is trying to predict the future or detect the current trend. True market trend changes have historically occurred very infrequently. Arguably only eight times since 1970, or only four times since 1994. (If there are several signals a year then they are NOT major market trend signals.)The average investor, armed with this simple trend data, is well able to manage their own retirement strategy. These identified changes in the long term market trend are your buy and sell signals. The typical investor could recognize these trends if the media would report the facts without the hype. The easiest way for most investors to get this information is to subscribe to a reputable service that delivers this information. Take control of your retirement account and don't be intimidated into a passive Buy & Hold strategy that is not in your best interest.
Disclosure: No Positions