July 28

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Losing Money By Not Losing Money

Finding a TV show that satisfies everyone in the family is impossible.  It's come down to two shows: Wheel of Fortune and AGT (America's Got Talent).

AGT is a worldwide talent show.  Some of the acts are incredible.  Last week we watched one act featuring a man who, after putting a scorpion in his pants, caught a flaming, knife-wielding bowling ball on his head.  You can't make that stuff up!

Five days until the pickleball tournament.  We've increased the intensity of our practice routine.  Please keep us in your thoughts.  🙂


People often say, "I lost all my money in the stock market in 2008." Or "I lost all my money in the stock market in 2001."

Really?! Did the stock market go to ZERO?

The Facts:

In the 2008 Great Recession, the S&P 500 dropped over 37%.

Never forget: markets temporarily go down and permanently go up. You would have recovered in less than four years.

In 2001 the S & P dropped 12% and went down 22% more in 2002. It took about four years to get all your money back.

These are both once-in-a-generation types of recessions.

So, how are these people "losing all their money?"

What they really should be saying is:

"I got some hot stock tips from my neighbor. I then went ahead and started day-trading those stocks. I was good at it! Then the economy tanked, and my stupid account ended at zero."

Or they should be saying:

"I invested $100,000 in a hot, new stock focusing on crypto-currency, and then the thing crashed, and I ended up with nothing."

Or

"I had all the money invested in company stock in my 401k, and the idiot company went out of business."

People with well-diversified, balanced portfolios will not lose all their money. For those hanging in there, it is not a realistic possibility.

Next time your neighbor or Aunt Jenny tells you about how they lost all their money in the stock market, don’t let it infect your thinking. You don’t know the whole story.

In the past week, I have had three separate people say the same thing to me.

"I kept my money in cash since the 2008 crash because while I understand I’m not going to MAKE any money- at least I’m not going to LOSE any money."

After the first person told me this, I thought, "That is reasonable. At least they feel safe and secure."

After the second person, I thought, "I guess that makes sense, but is this a rational and logical way to approach this situation?"

After the third person, I thought, "But you ARE losing money. You ARE losing money!"

You are losing money in three different ways.

While you may eliminate market risk, other risks are at play here. Inflation risk is a genuine issue. If inflation increases the price of goods and services by 5% per year and your money makes 1% yearly, you lose 4% of purchasing power annually.

You are also exposing yourself to opportunity risk. If a balanced portfolio of stocks and bonds were to return 10%, you just LOST 10%. Just because you didn’t see a red "minus" next to your account number doesn’t mean you didn’t lose money.

The year-to-date return of the S&P is over 18%.  If you were on the sidelines "waiting for things to calm down," you lost 18%.  It would take money years in the bank to return what that markets have in six months.

The biggest risk you face in retirement is "longevity risk," which is the risk that you will live much longer than expected. Your money needs to keep growing, period. You can’t rely on "safe" instruments with low returns.

Here is a real gut punch to anyone who moved their money to cash in 2008. $100,000 invested in the stock market in early 2009 is now worth $498,000. That means you lost $398,000. There is no other way to look at it. That is a much larger loss than the actual crash itself.

Ironically, if your money is "safely" working for you during retirement, you could dramatically increase your chances of running out of money.

That’s right. People trying to protect themselves from running out of money, might run out of money, by trying to protect themselves from running out of money (wow, that was a weird sentence).

Be Blessed,

Dave

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