Retiring soon? Let’s explore 3 crash proof retirement ideas for 2014. Know anyone that retired or wanted to retire in 2008? Let me guess, they’re still working right? The reason why, quite simply is that the single worst thing that can happen to the best laid retirement plan is to encounter significant losses right out of the retirement starting gate.
Think gravity is an irrefutable force? Right up their with Sir Isaac Newton’s force of gravity is the force of compounding. In other words, a dollar lost on day 1 of retirement means often hundreds of thousands of dollars in year 27. Conversely, gain a dollar on day 1, and well, you get it.
Here’s some cold hard math to illustrate; if a Retiree #1 with $100,000 experiences two back to back years of losses (say, -12% and then -8%) compared with Retiree #2 who earns 0% those first two years, AND each earns 7% every year to follow until year 27, the “loser” Retiree #1 will have in excess of 100% of his original investment LESS than retiree #2. Restated, Retiree #1 will have a balance that is $103,338 LESS than Retiree # 2 in year 27, simply because of the losses out of the starting gate. That’s a powerful force to respect.
So what do you do? While no one can prevent a market from “crashing” you can certainly crash-proof your retirement plan and take the path of the Liberated Investor.
Here are 3 crash-proof retirement ideas For 2014:
1. Hire an Advisor who drinks the “Tactical” Cool-Aid.
Study the merits of Tactical and Relative Strength investing versus the Buy and Hold dinosaur that handcuffed your buddy in 2008 to punching the time clock longer than expected. Tactical and Relative Strength methodology can steer you clear of markets like 2008 with a purely data driven approach. How? If, for example, Cash (we “relative strength’ers” consider Cash an asset class, just like stocks and bonds) is outperforming stocks and bonds (based simply on price performance/returns), well, then we own Cash—and NOT stocks and/or bonds. Utilizing an advisor that shuns Tactical/Relative Strength methodology is crash-proof mistake #1.
2. Quiet the Noise.
Noise? What Noise? The TV ads on CNBC or any other financial media outlet (when the ad runs, beware, its too late!) and the Buy and Hold Camp, to name a few. NOISE. For example, all you hear in the media right now is; “BUY AND HOLD, BUY AND HOLD, BUY AND HOLD.” The Buy and Hold camp is smiling pretty right now with S&P 500 buy and hold performance in 2013 of 30%. In 2008, not so much. The S&P racked up losses in excess of -38%. Make sure you and your advisor have a sound plan that is based on rules and data and not “noise” and emotion. Investor “Bad Behavior” is the first way to loose lots of money—and this happens when markets go south. Protect yourself, from yourself, and hire an advisor who has a formal rule book of plays based on indicators and data for good markets and bad. Utilizing an advisor who doesn’t have a rules-based plan for bad markets is crash-proof mistake #2.
3. Bye-Bye Modern Portfolio Theory (MPT) – Dump the Pie Chart.
2014 will not be kind to your outdated Modern Portfolio Theory (MPT) Pie Chart. Dump it. Instead, create a cash flow based investment allocation. First, dig deep into your budget and determine your TRUE cash flow needs. In other words, how much do you REALLY need to withdraw from your investment account(s) each year to live? Multiply that amount X 5 and you have an amount close to 5 years of cash flow needs—this amount needs to be invested in a stable or fixed basket of investments. Beyond your 5 year needs, invest the remainder of your retirement assets for capital growth. Why 5 years? Read up on how losses diminish with 5+ years to invest. A MPT Pie Chart in 2008 produced significant double digit losses in 2008. Utilizing an advisor that prints MPT Pie Charts in neatly bound presentations is crash-proof mistake #3.
Get the crash-proof theme? Find the right advisor. An advisor who is disciplined to a Rules-based strategy and says NO! to Buy and Hold, “Noise” and MPT Pie Charts. Get Liberated and get Crash-Proofed today!