September 12


David Kennon: You May Be Losing Money and You Don’t Even Know It

David Kennon, Kennon Financial

I think by now we have established this fact: Dying with too much money is a bad idea.

So if we all agree that it’s ok to enjoy the money that the money is making, the next obvious question is: “Where in the heck do we put the money?!”

For 18 years I’ve been chewing on this question. Nearly every Baby Boomer I meet in my office says the same thing, “I want to earn as much as possible, but I don’t want to lose too much money if the economy goes bad.”

Easier said than done. So let’s look at your options.

Choice #1: Park the money in a long-term CD. As of the writing of this article, the average 5-year CD is paying 1.3%. This strategy does not even keep up with inflation and would create a very weak income stream.

Choice #2: Buy a rental property. While some people buy a rental property to supply income for retirement, I’ve seen this strategy fail many times. You are one bad tenant or one major repair away from being in a tough situation. Taxes, insurance, and maintenance add up quickly.

Choice #3: Buy a bunch of savings bonds. Series “I” Savings bonds are paying 2.5%. Safe? Yes. Lots of growth. No.

Choice #4: Put all of your money in gold. Don’t do this. Believe it or not, gold prices are incredibly volatile and unpredictable. Plus gold doesn’t DO anything. It doesn’t pay interest or dividends. You are just hoping that the price of gold will go up.

Choice #5: Invest your money in an aggressive stock portfolio. While this strategy could work, if the stock market has a big downturn right after you retire you could be put in a tough spot.

Choice #6: Invest your money in a diversified and balanced portfolio of stocks and bonds. Ok. Now we’re talking. I’m certainly not the first guy who came to this conclusion.

After years of exhaustive research, I believe that Choice #6 is the correct answer for the vast majority of retirees. Why? The strategy has been quite effective for HUNDREDS of years.

This is not complicated. You put your money into financial products called mutual funds that invest in thousands of stocks and bonds for you. So if you own a few mutual funds you could own a part of many companies in the country or the world.

Let’s say you had put your money in a 50/50 stock/bond portfolio forty years ago. Your basic balanced and diversified portfolio….

During those 40 years, how many times did this portfolio lose money?

Only. Five.Times.

This is not my opinion, this is simply historical data. And while I can’t guarantee what will happen in the future…..

During those same 40 years, a 50/50 stock/bond portfolio would have lost money FIVE out of forty years.

1976 -2.06%
1993 -.80%
2000 -1.72%
2001 -5.92%
2008 -15.88%

I don’t even count 1976, 1993, and 2000. If you can’t handle a temporary loss of 2%, you probably should put your money in a CD.

In forty years, 2008 would have been the only one that really stung.

By the way, do you want to know what this exact same portfolio returned in 2009? 16.2%. You would have basically gotten your money back in one year.

Let’s look on the flip side of the coin. What was the average annual return of this portfolio over the past 40 years?

Around 10% per year.

For dramatic effect, I’m going to say that again. Around 10%.

We will discuss this concept more in a future lesson, but for now, it is essential that you open up your mind to the following opportunity: “A diversified and balanced portfolio of stocks and bonds may fit into my situation.”

Next time we’ll discuss how much money can you safely spend from your retirement savings each year once you retire. This could be the most important question you ever have answered.

Be Blessed,

David Kennon, Kennon Financial

Data and calculations provided by Thomson Reuters

There is no certainty that any investment strategy will be profitable or successful in achieving your investment objectives. An index is a portfolio of specific securities. Indexes are unmanaged and investors cannot invest directly in an index. Index returns are “total returns” with dividends reinvested, which means the return is not only the change in price for securities but any income generated by those securities. The performance of an unmanaged index is not indicative of the performance of any particular investment. Investments offering the potential for a higher rate of return also involve a higher degree of risk. Past performance is no guarantee of future results. Actual results will vary.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
The value of fixed-income securities may be affected by changing interest rates and changes in credit ratings of the securities.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Indexes are unmanaged portfolios and individuals cannot invest directly in an index. Actual results will vary.
This communication is for informational purposes only and nothing herein should be construed as a solicitation, recommendation or an offer to buy or sell any securities or product, and does not constitute legal or tax advice. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel.

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