Avoid Losing Money!

Avoid Losing Money!

This is the 5th step in a series of suggestions I first introduced in October of 2021 in my post; “How Can You Retire During Uncertain Times”? When I wrote that overview, I had no idea as to how much uncertainty would ensue over the following 5 short months!

Uncertainty Is The Only Thing We Can Count On These Days

If you took some of my suggestions back then, you would have avoided significant stock losses, locked in low mortgage rates and started to build your retirement income plan.

Having a plan and then following it is one of the most powerful ways to make sure your finances can provide they kind of future you want to achieve, regardless of market conditions.

Are You Avoiding Losing Money?

“Avoid Losing Money” seems so obvious, but I have found that most folks don’t have any idea as to how to accomplish this or even why it is important.

Here is how important this idea is, Warren Buffet is famous for many things, but perhaps most for his 2 rules of investing.

  • Rule #1- Don’t lose money
  • Rule #2- Don’t forget rule #1

One of the reasons this is so important is the difficulty in regaining lost ground.

For example, if your portfolio loses 25%, you would have to earn 33% to recover the loss, a 50% loss requires a 100% gain to recover.

This becomes even more critical the closer you come to living on your assets as you approach or are in retirement.

where does the damage happen

Where Does The Damage Happen?

The other thing that folks need to understand is that the longer we go between market corrections, the worse the damage when it comes.

To illustrate this, let’s assume that you have an investment account earning 7% and have $100,000 balance. In a bit over 10 years, your portfolio would grow to $200,000 and a 20% correction would lose you $40,000.

Now if you went 30 years at the same return of 7% you would have $800,000 and a 20% loss is now going to cost your portfolio $160,000!

So even though we hear the advice to always stay invested, the longer you stay invested, the greater the risk you are exposing yourself to.

How We Help You Understand Your Risk

We have a spreadsheet that helps to understand the risks of losing money on your investments after you start to live on your portfolio.

We have the annual returns from the S&P500 loaded into the spreadsheet starting in 2000 through 2021. If we had just taken a 5% withdrawal from the portfolio each year, the money would have run out of money in 19 years.

However, if you had earned half of the S&P500 in the up years and earned zero instead of losing in the down years, you would still have over 90% of the original portfolio value, even though you had been taking the same withdrawals each year.

Tortoise Or The Hare

Are You The Tortoise Or The Hare?

I am happy to share this spreadsheet with any of our readers. This is the most graphic example of how much more important it is to limit losses than it is to maximize gains. Like in that old childhood story of the tortoise and the hare, steady will win the race.

There is another cost, which might be even higher, when you lose money.

That cost is time. Time can be your friend if your money grows and compounds steadily as we saw in the example above. If you have a loss, the time spent recovering from that loss can’t ever be recovered.

Instead of growing your assets during the recovery from a market loss, you are spending time digging out of a hole. As a real world example think of 2007. In October of that year the S&P500 was over 1500.

With the crash of 2008, it took until March of 2013 to get back to that level!! That is 5 ½ years wasted on recovery instead of growth. If you were retired or about to retire, how would you have to change your plans?

Back in 2008, many folks ended up going back to work, selling their homes to make up for those losses or make other radical changes to deal with their new financial situation.

How Do You Protect Yourself?

There are many approaches and strategies that can be employed, which is best for you depends on your big picture.

  • How old are you?
  • Do you have other assets you can live off of, while waiting for recovery?
  • How is your health?

These are all considerations when evaluating options to protect your wealth.

  1. Have a plan. I see this all the time. Folks have made an investment in a stock or property and the value has gone up a lot. When I as them what the money is for they shrug. When I ask when the are going to sell, I get all the reasons they won’t; “I don’t want to pay taxes”, “it is going to go up more”, “I am waiting for it to recover in price, then I will sell” (this is going around a lot right now).
  2. What is your sell strategy? In my over 30 years dealing in financial services, it has become clear that it is much easier to buy than to sell. When you invest in something, we generally want to make a profit. It is important to understand that you don’t make anything until you sell. The value of assets go up and down, your property can appreciate, but, if an asset isn’t paying you income, you don’t make anything until you sell! Late last year many folks were asking why some investment didn’t do as well as the S&P500. Many were very disappointed. Some of those folks are much happier now since the market has dropped over 10% this year, with many stocks down by 50% or more. Especially many of the tech highfliers of the past few years. It reminds me of the old Frank Sinatra song that goes “Riding high in April, shot down in May”. Not having a sell strategy when you buy costs many folks all their profits and then some.
  3. Keep your perspective. When things are going well, it is understandable to forget when things were going poorly. Over the past 13 years, the stock market and other markets have had mostly an uninterrupted rise. When that happens, folks start to think that it will keep on going up. The thing to keep in mind is that every day an asset goes up in value, it is a day closer to going down. The reverse is true as well. Back in 2008, articles were everywhere predicting that the Dow Jones Industrial Average would go down to 5,000 or even 3,000.

protect yourself

The key is to not get too up or too down. Stay rational and understand money is a tool.

Once you know what you need the tool for, you can figure out what is the right tool to get the job done.

You may want to review the previous 4 steps. You can find them here.

By keeping your perspective, having a plan and following it, you can enjoy a very Happy Retirement!

Roger L. Gainer, RICP ChFC, California Insurance license number 0754849 is licensed to sell insurance and annuity products in California, Illinois, Arizona, and Nevada. Roger L. Gainer is an investment advisor representative providing advisory services through HFIS Inc. A registered investment advisor. Gainer Financial and Insurance Services, Inc., is not owned or affiliated with HFIS Inc., and operates independently. The contents herein are the opinion of the speaker and should not be considered as tax or legal advice. This podcast should not be considered a solicitation for investing or advisory services. Strategies mentioned are not a recommendation to implement or purchase those products or strategies. You should contact your own advisors as to the appropriateness for your specific situation.