Hail Mary passes succeed just enough to hold football fans’ intrigue, but fail so frequently that coaches have only one reason to use them. The reason? There is NO other option.
As the college football season began, BYU managed to win its first two games on Hail Mary passes. Discounting the likelihood of Divine intervention, it is a game plan upon which no one would want to depend.
There are at least two lessons to be learned from the Hail Mary pass as it relates to investing. First, unlikely stuff happens and it can ruin your day (and your life, if we’re talking about your retirement). Second, the coaches and players would have preferred that their meticulous game planning, hours and hours of practice and all the other more routine plays on offense and defense would carry the day. A plan with dependable results (in football and investing) is a far better winning formula than counting on one last-ditch play.
UNLIKELY STUFF HAPPENS
BYU’s first win was at Nebraska, a football holy land where the Cornhuskers had won 29 straight home openers. BYU was forced to insert freshman quarterback Tanner Mangum in the third quarter because of a season-ending injury to their starter. Mangum dropped back to pass on fourth down as time was running out and hit Mitch Matthews 35 yards away at the goal line with a pass everyone in the stadium and watching on national television knew was coming. A week later, BYU was down 24-21 to Boise State with 42 seconds left in the game. On another fourth down play, Mangum hit Mitchell Juergens with a 37-yard touchdown pass. Again, everyone knew what kind of play was coming.
In both cases, BYU was the underdog and had trailed the entire game. The odds of the Hail Mary succeeding are close to zero. I’m writing this from the Dallas area, where they still talk about the famous Roger Staubach to Drew Pearson Hail Mary in an NFC Championship game, but that was 40 years ago. If you were a betting person, there is no sane way you would bet on the success of a Hail Mary.
Stepping back from football for a moment, one of the biggest upsets in the history of sports occurred this month at the U.S. Open Tennis Championship. In the women’s semifinal round, Serena Williams was ousted by unseeded Roberta Vinci of Italy. How unlikely was that upset? Williams was a 30-1 favorite in the Vegas betting odds. Some tennis experts call it the biggest upset in the history of the women’s professional game.
These events are NOT supposed to happen and, based strictly on probabilities, they usually don’t. But the cold hard fact is that they can and do happen.
My point in all this goes back to what I consider as one of the investing world’s biggest myths, which is: “In the long term, the stock market always goes up.” This statement is usually based on studies that look at the market going back to either the 1920s or the 1870s. It has been a standard for years in the financial services industry to encourage investing in diverse stocks, count on a 10 percent gain over time after accounting for some ups and downs, then retire with a plan to live on dividends and interest plus a withdrawal of 4-5 percent of the principal annually.
The “truth” of that strategy is that over the history of the market, you can find steady gains. The real “truth” is that since 1896, there have been four periods of 10 years or more in which the market had flat or negative returns. The last one ended not that long ago, in 2010. (see chart for a detailed illustration)
If you were retired or preparing to retire and had your nest egg exclusively in stocks, no matter how diversified, and one of those periods hit, ask yourself what that would do to your portfolio. It is likely that it would hamper your future lifestyle, which was in fact what happened in 2008-2009 to many retirees or those close to retirement.
This is a case where the “unlikely stuff happens,” except that if we really studied and remembered the past, we would know that it has happened before and there is no reason to believe it won’t happen again. While considering the unlikely stuff that can happen based on history, I should remind everyone that there is also unexpected stuff that happens and is NOT based on history, because it is new. We don’t know what we don’t know. Economies change, and this economy is definitely different.
A MORE DEPENDABLE APPROACH
Safe to say that most of us would prefer to have our retirement income based on a more sound approach than the Hail Mary.
So, what is that approach?
My firm uses what we call Lifestyle Driven Investing™, and it starts with figuring out how to address the necessities of life. I classify these as Needs, and they include food, clothing, shelter, life insurance, long term care and disability insurance. The other categories are paid for as funds are available and we label them as Wants, Likes and Wishes.
To avoid the Hail Mary approach, your investment to fund the Needs category must produce sufficient income when you need it, presumably at retirement. This has to be available as cash flow. The second big criteria is that it must be considered safe or predictable or guaranteed. Rarely will you find an investment that includes all three of these attributes, but I believe it needs to be able to defend at least one to fund Needs.
I have intentionally made the criteria for this category very strict because they are the key to survival. For the other categories (Wants, Likes and Wishes), my recommended criteria are more flexible.
Still, it all comes down to a predictable plan. Know and understand the odds of success. You will sleep better than relying on the Hail Mary.
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, a registered investment advisor. Investment advice offered through Stratos Wealth Partners, a registered investment advisor. Botsford Financial Group, Lifestyle Planning Solutions and Stratos Wealth Partners are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Stock investing involves risk including loss of principal. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.
