I’ll admit that I know nothing about what your particular retirement plan looks like. However, if it is like most of the prospective clients I meet with where the bulk of your assets are in a 401K or an IRA, then suffice it to say the grade you’d be getting from me is an F. So why am I so harsh on 401k’s and IRA’s? I’ll share one reason why with you in this article and more in follow ups I do to this article.
First, like most people planning for their retirement, you’ve probably realized after looking at your 401K and IRA statements, that the stuff you heard in the media about the proverbial “lost decade” did not exclude you or your accounts. For most investors, the first 10 years of the 21st century have been a very harsh one. Many investors have seen little or no growth in their retirement accounts over that time period. To make matters worse, they’ve also seen the values of their homes shed a lot of excess weight in its value. So not only are their retirement accounts trying to “catch up” but so are the values of their homes?
So there you have it, a decade lost. That’s 10 years down the tubes. 10 years of what you worked so hard to accumulate in values, disintegrated in a matter of a couple of years. So tell me, if you suffered a 50% loss in value to your accounts, how much gain are you going to need to get back to break even? If you guessed 100% you are absolutely right. Here’s another question: If and that’s a capital IF, you are able to get 10% returns annually, let’s make it 10% simple interest just to keep the math easy, then how long will it take you just to get back to break even? If you said another 10 years then you’re also right. So what you should be getting from this is that this lost decade will result in another lost decade for you as you spend the next 10 years just trying to get back to what your account was once worth.
So just so we are clear on this, if your account was worth $1,000,000 in the year 2000 and you lost 50% of its value at the conclusion of the stock market crash of 2008 and 2009, then it’s value in 2010 is just $500,000. What that means is IF you are fortunate enough to earn 10% each year for the next 10 years, you’d end up being worth $1,000,000 again in the year 2020. And that’s only if you are lucky enough to earn 10% per annum for 10 years in a row. So again, what was a lost decade is really two lost decades. Let me ask you another question: Do you really have 20 years of your life to waste as a result of the market’s volatility?
My analysis above assumed you’d be able to earn 10% average returns over the next 10 years which many knowledgeable experts within the industry do not believe that the stock market will generate 10% average returns over the next decade. Warren Buffet himself said 6% returns are more likely for the stock market and that was back in 2000. Obviously he was a bit too optimistic as that same time period resulted in the lost decade I just mentioned. Yale Economist, Robert Shiller, says the stock market’s past high returns were an anomaly and based on the 10 year price to earnings ratio of stocks, a 4% return is more likely. At 4% it is likely to take you 25 years to see the 100% return you need to just get back to break even. So the question I should be asking you is have you got 25 years to spare?
What if I could guarantee you a 20% average return over the next two years. Would that help you with recovering the capital you lost? If you said yes, I’d caution you to be careful there because I know what you are thinking. You’re thinking you’d actually end up with more money after two years with a guaranteed 20% average return aren’t you? If what you thought to be true about a guaranteed 20% average return over two years turned out not to be true, when would you want to know? Hopefully now!
The truth of the matter is if you gave me $100,000 to invest and I generated a 100% return for you after the first year, you’d have $200,000 in your account. If in the second year I lost 60% of your account balance, that $120,000 loss would reduce your account balance to $80,000 resulting in a real loss of $20,000. However, you would still have earned a guaranteed 20% average rate of return. How you ask? It’s really just math. The average of a 100% gain in year one and a 60% loss in year two is 20% and that’s the guaranteed 20% return I said you’d get. The 20% guaranteed average return is just math. The $20,000 real loss is money and that’s what counts. I hope a light bulb just went off in your head. As Cuba Gooding once said, “Show Me The Money!” Unfortunately, average returns seldom show you the money but real returns always show you the money.
Do you now see the reason why I say that the grade I would give your retirement plan would be an F? If your retirement plan’s growth is determined by average rates of return which is by and large what most investors are doing in their 401K’s and IRA’s then I have no other option but to give you an F. Your average rates of returns mean absolutely nothing and are one of the reasons why quite frankly your retirement plan sucks!
After years of realizing how utilizing average rates of return to grow my money was one of the biggest unintended holes in my financial bucket, I decided to plug that hole which resulted in me being able to fill my financial bucket to the brim and achieve financial independence at the tender age of 34 in 2008. One of the keys was simply refusing to settle for average rates of return on my money but instead demanding real rates of return on my money. Unlike average rates of return, when earning real rates of return on your money, your account values grow over time and you avoid the proverbial “lost decade” that many have experienced.
If after reading this article you realize that perhaps one of the problems you’ve been experiencing in your quest to improve your financial position is the fact that you’ve been earning average rates of return, don’t despair as there is a solution to your problem. You just need to work with someone that can help you earn real rates of return on your money. My clients and I have our money invested in such a way that we earn real rates of return.
The reason I avoided the market crash of 2008 and 2009 is because I had my assets positioned in a diversified portfolio of investments that earn a consistent fixed real rate of return of anywhere from 6% per annum to 16% per annum. I help clients everyday to appropriate similar strategies. Don’t you owe it to your financial future to start earning real rates of return versus average rates of return? Isn’t it time you plugged that hole in your financial bucket? Do you know what other holes you have in your financial bucket? These are all questions you should know and answer for yourself if you want to truly win the money game and achieve financial independence.
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