So here we are 7 months into the year with barely any change in the overall economy, and the stock market continues its wild “orgy like” party compliments of the 3rd and latest Federal Reserve stimulus program. I mean let’s be honest, we know that the DJIA did not go from its 2009 low of 6600 up to today’s newest government funded high 15,500 based on economics or an actual recovery because up until very recently, we saw no signs of any recovery to write home about. So to say that we are where we are because of economics or the strength of our economy would be incorrect. And the recent market volatility was proof that if the government pulls the plug or even starts to dial back the drug called QETernity, the market will quickly reveal itself as unstable and unsustainable, and that will be our 3rd crash in a very short period of years.
But I am not here to bash the government or the system or the stock market because my clients and I have greatly benefited from this greatest-in-history stimulus party.
The question I want you to ask yourself today is this…Are you doing anything differently today in regards to the way you approach your investments compared to what you were doing back in the crash of 2008 or 2000? In other words, if you turned back the clock to the year 2000 or the year 2008 and looked at how you were investing your retirement funds or your kids education funds or your family foundation back then, are you doing anything differently than you did before or are you using the same basic approach? Because here’s the thing…if you’re like most investors, you got pretty banged up in 2008 and maybe worse in 2000, and you know that it’s only a matter of time before the next unbelievably-spectacular surprise meltdown occurs. And you know in your heart that this is a limited engagement show, and when the powers behind the show decide it’s time to go, you won’t be able to dodge the bullet any better than you have in the past. So HOW HAVE YOU PREPARED THIS TIME any differently than the last 2 times? Have you, in any way, made your portfolio more CRASH PROOF, or are you just willing to take another 40-50% drop to the basement and start the insanity all over again?
Now if you’re like most Americans, you are a heavy user of public swimming pool type investments where you throw your money into gigantic pools with other people and let someone you’ve never met manage the details someplace in Boston or New York. I’m of course talking about mutual funds. And if you are one of the 49 million Americans that actively participate in a 401k, I know that you think you have no choice since your company 401k menu only offers mutual funds.
So what can you do, inside of your 401k for example, that can arm you for the next battle that’s getting ready to crush your retirement account again? The answer is to start thinking like the 1% does. Stop and ask yourself, how many wealthy people do you know who got wealthy by blindly throwing their money into huge public pools with other people and basically closed their eyes and counted on some theory written in 1953 that said that what you own inside of the pie chart doesn’t matter and that it’s all about the mix between stock and bonds?. And let’s be honest, over the last 20 years since Harry Markowitz earned a Nobel Prize for his Modern Portfolio Theory (the theory of asset allocation), the only people who have consistently made tons of money are the very firms that manufacture and market mutual funds. Individual investors have meanwhile had one of the worst 20 year periods in history and were actually outperformed by risk free 30 year US Government treasury bonds during the same period. The truth is you will be hard-pressed to find one truly wealthy person who made their fortune by ignoring the details of their holdings and just taking a big picture view. Wealthy people keep a close eye on the details of what they own and the potential risks they might be exposed to. From there, they pick a handful of well chosen investments that they fully understand and keep a close eye on. That is the exact opposite of the pie chart investing model that Wall Street has sold you on for the last 23 years.
So what can you do to be more like the 1% and less like the 99%? The answer is easier than you might think. You simply need do a little homework on what’s in the water of your public swimming pools and remove the funds that don’t cut it. That means calling each fund company that you own and asking for a prospectus and top 10 holdings report. In the prospectus you are specifically looking for things like the manager being allowed to use leverage or derivatives to “boost” performance. Those tools can be great in rising markets but they become road-side bombs when markets crash. As for the top 10 holdings report, you need to get one for every fund you own and see how many of your top 10 holdings repeat themselves though out your different funds. After all, if you find that 3 of your 4 funds in your 401k have very similar top 10 holdings, you’re really not diversified as much as you think you are.
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Information presented in this blog post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for all readers. A professional adviser should be consulted before implementing any of the strategies presented.