It may come as a surprise that I believe in taking an “agnostic” approach when it comes to financial planning. That word has nothing to do with my religious beliefs. Rather my professional observation that traditional financial planning methods often fail to answer the most basic retirement worry: “Will I run out of money before I run out of time?”
It would not be a stretch to claim I’m not a big fan of Wall Street or the traditional methods most advisers use for retirement planning. I walked away from those methods more than twenty years ago when it became evident to me that traditional asset allocation models did not always address the biggest concerns of investors– the fear of running out of money before they ran out of time. Equally scary to most people was the thought of having to rely upon or be dependent upon their children. In my opinion, there is a better way to manage your portfolio but before you can embrace a new way of thinking, you must understand the myths Wall Street wants (and needs) you to believe.
The number one Wall Street myth and the first one that should throw up a red flag is if you hear: “Don’t worry; over the long term, the stock market always goes up.” Most investors have heard this all of their lives. The party line is that if you just sock away cash in stocks on a regular basis, ignore the ups and downs of the market, in the end you’ll be just fine. Then when you retire, you draw 4-5 percent annually from it and you step away happily ever after. Sounds easy, right? The good part of the mantra is the concept of regular savings; the bad part, or at least the unreliable part, is the concept that “long term” the stock market always goes up.
Here are the problems:
- The concept is rearward thinking, not forward thinking. It is based on past history, and this economy cannot be counted on to be like history. Have you noticed that on the bottom of brokerage statements or offerings for investments are these words (or their equivalent): “Past performance is no guarantee of future results.” The disclaimer tells us all we need to know, but the disclaimers often are ignored or glossed over. Although international in perspective, this article from Canada’s Globe and Mail illustrates how all markets have dry spells, or in some cases, dead spells.
- You must grasp the concept of “long term.” The growth claims usually are based on history dating back to the 1920s or even the 1870s. The fact is, there have been multiple periods of 17 years, 18 years and even 25 years in which the market was flat or lost value. The question you have to ask yourself: “If markets stay flat or go down for a decade or more, will my current financial plan allow me to sustain my desired lifestyle?” You can see a visual representation of these long market lulls in this chart.
I outline three other big Wall Street myths in my book, The Big Retirement Risk – Running Out of Money Before You Run Out of Time. Briefly, they are:
- Myth #1: Diversification and asset allocation are the keys to success. Proponents of this must have missed 2008, when everything decreased in value at the same time.
- Myth #2: Investing through a major financial services firm gives you more options. No, often to reduce liability to the “mother ship,” many of the big firms keep their retail offerings simple. The better choices to help protect your assets often are found outside Wall Street.
- Myth #3: You net worth determines your lifestyle in retirement. (No, no and NO. Cash flow is the key. You MUST have cash flow to eat and put a roof over your head).
You can find more information about these myths and the concept of “Lifestyle Driven Investing™” approach at www.botsfordfinancial.com.
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.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.