Sunday, December 2, 2007

The Stock Market Roller Coaster Rides Again

I am getting too old for roller coaster rides. And if you are within 15 years of planned retirement, you are, too.

Decades ago, when the real estate market, dragging hundreds of savings and loan associations with it, came crashing down thanks to the ’86 Tax Act, a financial salesman I knew said to me, "Well, we'll just have to wait for a whole new group of suckers".

That was crass and nasty, but contained a measure of truth. He understood that financial advisers have a hard time convincing their clients to seek financial goals in logical, ways. And too often they will gravitate to the “hot product” as a better solution. Sadly, by the time a “good investment” becomes a “hot product”, the latecomers are the ones who “buy high/sell low”. And the client becomes angry, frustrated and disenchanted.

By the late ‘90s, the stock market was roaring. Outrageous gains were being made by those who were in the market. On TV the talking heads stared right into the cameras and confidently told us all that there was no reason to think that the market would stall out any time soon.

Back then a number of friends who were planning to retire soon are still working eight years later, thanks to that Nest Egg Meltdown. That should have never happened and could have been avoided.

The market reached its peak and could not sustain itself. Far too many watched the market – and their nest eggs - tumble, bravely hanging on until their portfolios settled back where they had been 10 years earlier. Then they sold.

And they traded in their portfolio for a nice, steady, fixed income investments which , after taxes, barely kept up with inflation.

So, let's review their retirement planning strategy:

They bought into the hot market when stocks were high; sold when they were low; and then placed their future retirement nest egg where it would “safely” lose value. And you wonder why people don’t trust financial advisors?

Let's jump to 2005. My next door neighbors sold their home for about three times what they had purchased it for three years earlier.

At the time they sold, I was working with a couple in their early forties who were in a perfect position to take a very healthy retirement nest egg and place it so that it would continue a healthy growth in the market and still avoid meltdown due to stock market downturns. When the time came to implement this strategy, they backed out because a friend showed them how lucrative the real estate market was.

But they are young enough to recover, hopefully.

As a result of the real ester “correction”, the stock markets are bouncing up and down – not sure how to handle tumbling real estate values and a tightening credit market. The Real Estate Boom That Would Never End has turned into another Nest Egg Meltdown.

So, what is the next hot, sexy, investment product to energize a market that is simply trying to build up its retirement nest egg?

When you find it, run. Run like crazy in the opposite direction.

The Moral:
There is no perfect investment or investment vehicle for you. And there is no magic pill either. All there is is careful planning, knowing your goals, getting a grip on your resources, and selecting the best choice of strategies/solutions.

And stick with it, with annual reviews.

“Gee, Tom that sounds nice, but can’t you be more specific?”

OK, follow these three tips…
(1) Let the professionals work for you. Major investment company fund managers get paid big bucks to select what’s best for every different client scenario. They are not perfect, but, whereas the market has averaged over 10% growth each year since 1929, the individual investors earned just over 3% a year
(2) Do not be afraid of investment programs that offer guarantees that the dollars you invest will always be there no matter what the market does, and further guarantees a set level of income if you choose to tap into those funds for retirement. These are not the perfect solution for everyone, but when they fit, they can fit very nicely. And finally…
(3) Call me to explain the first two.

Forget the Space Mountain roller coaster ride. I think I’ll go ride the Trolley down Main Street.

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