If you're old enough to remember the 1980s, you've undoubtedly heard the
conventional wisdom about retirement investing from a slew of financial
advisors. Here's how it goes:Invest in equities, through quality mutual funds, diversify properly
relative to your tolerance for risk, hang in there for the long-term dont
panic and everything will work out fine you'll achieve your financial goals
and enjoy a comfortable retirement. Or something very close to that, right?Basically, ever since Oliver Stone's movie Wall Street, we've all been told
that the stock market will go up and it'll go down, but over the "long-term"
were all but certain to do better investing there than anywhere else.Today, something like 75% of all Americans are invested in the stock market
in one way or another, and they do so believing that this is the path to
accumulating the amounts they need to retire comfortably. Americans invest
in the stock market through their employer-sponsored retirement plans, their
IRAs, their pensions, insurance policies, and more. It's become accepted
conventional wisdom: If you want to invest for the future, you need to have
most of your savings in stocks.It seems like a maxim thats been around since Aesops Fables, but thats
simply not the case.Consider that in August of 1982, the Dow Jones Industrial Average hit 772,
but by that year's end, an interest rate fed Bull Market was born and it
would last for an astounding and unprecedented quarter of a century. On
October 9, 2007, the Dow Jones Industrial Average closed at a record
14,164.53.Seven hundred and seventy two to fourteen thousand and change? Now, thats
what I call a bull market. So, what is the definition of a bull market? That one is easy. Mandelmans
Dictionary defines bull market as: A temporary condition that makes
investors feel like geniuses.Well, the proverbial jury has now been in for some time and I'm sorry to say
that the news is not good: We've been lied to. Deceived. Misled.
Manipulated. And, as a result, our ability to save the amounts we need to
retire comfortably is well, shall we say somewhere between lacking and
nonexistent. We've been confounded by charts. Stunned by statistics. And
buffaloed by B.S.Avoiding Future Financial ShockIf you're under forty years old, chances are there's no talking to you about
investing for your future. If you're over forty, you're looking at 65 as
being just around the corner, and it's now critically important that you
take a moment to take stock. No, not buy stock JP, I said take stock.As baby boomers, our retirement years are approaching faster than any of us
wants to think about. If you don't start to scrutinize your views on, and
skills related to investing for your future years, then what's in store is
likely to come as quite a shock. To avoid that future shock, we need to
better understand how we all got here, so we can change the way things go,
going forward.Understanding BubblesWe seem to have a love-hate relationship with bubbles. It all started in
mid-1980s, when "greed was good," corporate raiders were modern day cowboys,
and junk bonds meant that money was flowing through Wall Street like lava
from Mt. Vesuvius.Of course, much like what happened when Vesuvius erupted above the town of
Pompeii in 70 AD, it all soon came to a standstill. The "Black Monday"
market crash of October 1987 signaled the end of an era. Drexel Burnham
Lambert, Mike Milliken, Charlie Keating, Ivan Boseky, and the other names
that had by then permeated our lexicon as being leaders of American
business, all ended up to be major disappointments, to say the least. The
bubble popped, S&Ls went under, and suffice it to say it was a real mess
that was certain to trigger a bad recession. All of a sudden we went from
thinking that having a new BMW was cool, to viewing a mini-van and a savings
account as much cooler.Then, after weathering the recessionary storm of the early 1990s, we saw
little company named Netscape go public, and soon three initials were on
everyone's mind: I, P and O. Everyone was "doing it". We heard stories of
business plans written on napkins by college drop-outs raising innumerable
millions, our neighbors all seemed to have bought Cisco Systems at $6 a
share, and tiny AOL, who was attempting to wallpaper the planet with free CD
ROMs would soon be buying out media mega-giant Time Warner.It didn't make a lick of sense to many people, me included, but the stock
market was flying high, a "new economy" had supposedly arrived, and early
retirement became the buzzword of the day. Cab drivers were day trading, and
just about everyone over the age of 18 had a stockbroker on speed dial.
Never mind that Alan Greenspan was warning of irrational exuberance and
Warren Buffet was sitting on the sidelines. Never mind that the companies we
were investing in didn't make any money. Other people at least appeared to
be getting rich, so in the spirit of Sutters Mill, we jumped in with both
feet.Then, on April 10th, 2000, the bubble popped again. American consumers lost
$7.3 trillion as a result, and prayers rang out across the land. We promised
God that we would only buy bonds for the rest of our lives, if Cisco would
just come back to $84 a share, even for a moment. IPO, as it turned out, didnt just stand for Initial Public Offering. It also
stood for: It's Probably Overpriced.When the dot-com bubble popped in 2000, the United States was plunged into a
recession that many feared could become quite serious, as the prospect of
"deflation" came into view. But, the Federal Reserve under Greenspan,
determined to avoid a replay of the 1970's economic malaise, lowered rates
and opened the floodgates of capital. Almost overnight, real estate became
our savior-du-jour, and soon it would be our homes that would save us from
ourselves. Someone that lost his or her bet that Amazon.com would reach $400
a share, could still be assured a comfortable retirement simply by owning a
home and perhaps investing in a duplex. Or, as my good friend Ernie Banks of
the Chicago Cubs might have said back then: Its a beautiful day for an open
house Lets buy two. (Sorry Ernie, I couldnt help that.)"Real estate is by far the safest investment you can make. Housing prices
will never fall like share prices." That was the thinking way back then,
remember? "Pets.com may go to zero, but a house simply can't do that."People ignored anyone suggesting that yet another bubble was in the making.
And when I say people, Im including the Chairs of the Federal Reserve Bank,
among countless others. The fact that housing prices had fallen after
previous booms, such as in 1990, didn't seem to matter. "This time is
different", was the thinking of the day. Of course, that was exactly what
the stock market analysts had said in the latter half of 1990s, but we
didn't seem to remember that far back for some inexplicable reason.Here's what the venerable Economist magazine printed in May of 2002:IF THERE is one single factor that has saved the world economy from a deep
recession it is the housing market. Despite the sharp fall in share prices
and a worldwide plunge in industrial production, business investment and
profits, consumer spending has held up relatively well in America, supported
by low interest rates and the wealth-boosting effects of rising house
prices. Over the 12 months to February average house prices in America rose
by 9%, the biggest real increase on record in America.Yes, we were all blowing hot air into yet another bubble and by 2005 that
bubble was approaching the size of Saturn. Here's what the Economist wrote
in June of 2005:PERHAPS the best evidence that America's house prices have reached dangerous
levels is the fact that house-buying mania has been plastered on the front
of virtually every American newspaper and magazine over the past month. Such
bubble-talk hardly comes as a surprise to our readers. We have been warning
for some time that the price of housing was rising at an alarming rate all
around the globe, including in America. Now that others have noticed as
well, the day of reckoning is closer at hand. It is not going to be pretty.
How the current housing boom ends could decide the course of the entire
world economy over the next few years.Never before in history of the world had housing values gone up so fast, so
much, and for such a long period of time. The rising property prices that
had helped prop up our economy after the dot-com bubble burst in 2000, but
it was about to get ugly.According to estimates published by the Economist in the second half of
2005:The total value of residential property in developed economies rose by more
than $30 trillion over the past five years, to over $70 trillion, which is
an increase equivalent to 100% of those countries' combined GDPs. Not only
does this dwarf any previous house-price boom, it is larger than the global
stock market bubble in the late 1990s (an increase over five years of 80% of
GDP) or America's stock market bubble in the late 1920s (55% of GDP). In
other words, it looks like the biggest bubble in history.Of course, by the time 2007 appeared on our calendars, the real estate
bubble had popped over a year before and many of us, for THE THIRD TIME,
were again trying to get the gum out of our collective hair. The economic
crisis we now face, as a result of the giant real estate bubble having
popped, has decimated our wealth, and has only just begun to destroy our
national psyche.So, three bubbles we're three for three. What's next? Are we waiting for yet
another GET RICH NOW, ASK ME HOW OPPORTUNITY, through which we can finally
catch up so we can retire in style? Or will we finally learn that we can't
afford any more of those fabulous, sure thing opportunities?It is the view of many self-proclaimed "experts" that it is we investors
that are the culprits. We, as the thinking goes, are our own worst enemy. It
is simply human greed that creates the bubbles that cause us such financial
harm. And therefore, since greed is here to stay, we are doomed to repeat
our past behaviors. But is this easily reached assumption really true? Are
we really just greedy opportunists receiving our just desserts as the
bubbles we create inevitably pop?The answer is unequivocally "let's hope not".There's no question that greed is an inherently human trait that we are all
capable of exhibiting under the right circumstances. But, to assume that
greed is what fuels our collective investor psyche in my mind is simply too
cynical, along with feeling like a conclusion far too easily reached.Consider, for example, that most of the people that saw their 401(k)
balances decimated as a result of the dot-com bubble's demise weren't being
greedy when they jumped on the technology bandwagon. Greedy people, one
would think, would be more careful more crafty. Greedy people don't leave
75% of their retirement investments in their own companys stock, and then
sink the rest into a technology growth fund. I would tell you that its not greed that drives us to our lemming like
self-destructive behavior. People jump on such bandwagons, not because
theyre greedy, but because they don't want to be left out of what everyone
else is doing, and from which many appear to be benefiting.Being left out sucks big time. We hated being left out in elementary school
and high school, and we don't like it any more as adults. No one wants to be
the one still looking for an empty chair when the music stops. The feeling
of being left out, like greed, is a basic human trait, but it's much more
commonly shared than greed. There are unquestionably some among us that are
greedy, but none of us relishes the idea of being left out.So, while we do provide the air that inflates our market's bubbles, it's not
being driven by all-too-human greed. We are simply trying to ensure that we
are not left out of a party to which so many of our peers appear to have
been invited.Human traits, such as greed are not things we can change such traits can
only be controlled to varying degree. However, human beings will never like
the feeling of being left out not even for a moment.With all of this in mind, it shouldn't be difficult to imagine how
investment bubbles keep happening around the kitchen tables across this
country. "Honey, we should buy more technology stocks Joe and Mary bought
more technology stocks why can't we buy more technology stocks?Or, more recently: "Honey, we should buy another house Joe and Mary just
bought another house Tom just bought a place in the desert everyone but us
has at least two houses shouldn't we buy another house? We don't want to be
left out!!"Left Out of a Financially Secure FutureDuring the technology bubble of the last half of the 1990s many of us were
contemplating an early retirement as a result of what looked like was
newfound investor prowess. Today, we're not entirely sure that we will be
able to retire at all, and few of us can remember the name of the last
stockbroker we used. Just try mentioning that you received a "tip" from a
broker at an upcoming social gathering and you'll quickly see how risk
averse we've actually become.Oh sure, we haven't appeared to be all that gun shy these last few years,
but that's only because we were floating around in the real estate bubble.
But make no mistake about it those that jumped into real estate were driven
by a need for the assumed relative safety of the real estate market. No one
thought investing in real estate could be overly risky because everyone was
doing it, and because houses, regardless of their purchase price, could not
end up being worth nothing, as was the case for shares of Pets.com and Home
Grocer.Those that got into real estate later in the game, however, did so not out
of greed but to ensure that they would not be left out. Numerous studies
conducted after the dot-com collapse support this hypothesis. For example,
many people reported feeling much less embarrassed about losing money on a
popular stock that half the world owns - like AOL or Yahoo - than about
losing on an unknown or unpopular stock. As long as everyone's losing or
winning we're okay with it.This is another example of why we're terrible at investing: We buy what's
"hot". All data shows that money flows into high profile mutual funds much
faster than the money that flows out of underperforming ones. As a result we
continually buy high, and sell low and it would seem are destined to do so.There are many other aspects of human behavior that impact our ability to
invest effectively. Some studies show that we're more scared of losses, than
we are happy about gains. Anchoring is the concept that shows that people
tend to place too much credence in recent market events and opinions, and
ignore historical, long-term averages and probabilities. And most of us are
just generally overconfident. Countless studies show that people generally
rate themselves as being above average in their abilities. We often
overestimate the precision of our knowledge, and our knowledge relative to
others.We're human, and therefore we're doomed?It would be easy to reach the conclusion that as flawed human beings we are
doomed to repeat our failures as far as investing or preparing for our
future goes, but I don't believe that has to be true. I believe that, by
understanding our inadequacies, we can overcome our established tendencies.The Solution: Change your view of what you don't want to be left out ofIt's time to take hold of the law of nature that dictates that we, as human
beings, don't want to feel left out, and harness its power to our advantage.
We can learn from the past if we want to.Consider this: What's the one thing, more than anything else, that you don't
want to be left out of: A comfortable retirement, right? Imagine being left
out of that. Imagine watching your friends and relatives vacationing
together, while you remain at home constrained by a budget far less than you
lived with throughout your working life. Perfect. Now that you have the time
to travel, you can't afford to. Imagine what it would be like to run out of
money long before reaching your life expectancy your last ten years of life
spent struggling to exist below the poverty line.Are you imagining the horror of that situation? Good. Now, compare that with feeling of being left out of buying Cisco Systems at
$6 a share, or not buying real estate when everyone else was. If the latter
is a pinprick, the former is amputation of both your arms and legs right?Once you realize that the most important thing not to be left out of is your
own comfortable retirement, you can begin to change your perspective on what
you need to do differently in order to make sure that you're not.Savings and Returns on InvestmentsThe first step is to save as much as you can, but for the purposes of this
article, that's a given. The next step, as any investment advisor will tell
you, is to invest those savings, within a certain tolerance for risk, in
order to maximize your returns on investment or ROI.That's what we're told, isn't it? If we are to reach our financial goals,
it's the long-term performance of our investments that reigns supreme? And
it makes sense, on the surface anyway. Of course you should take steps to
maximize your ROI, right? If you see one fund doing better than another, it
stands to reason that you should put your money where the returns are
higher, assuming the risk of doing so is not significantly greater. Doesn't
it?I'm not at all sure it does, how about that? In fact, I'm pretty darn sure
it's all a pile of crap. ROI is investment advisor horsepucky, nothing more.
Its twaddle, of the highest order.I'm going to tell you something you may not have considered before: Chasing
ROI is a fool's errand a waste of time essentially, its entirely pointless.Why? Why would it not matter what your ROI, or return on investment was? How
can that be? Is that what you're thinking? Because that is what you should
be thinking that's certainly what I would have been thinking before I spent
almost all of 2008 intensively studying the markets as related to retirement
investing. Now, I'm thinking very differently.ROI doesn't matter for several reasons. The most important one is that your
up years dont really matter nearly as much as you probably think they do. In
reality, it's the down years that kill you. If you had invested over the
last 25 years in order to earn just a 3-4% annual return every year and
never a penny more, but you could skip all of the down years chances are
you'd be a lot better off today.The other reason that attempting to maximize ROI isn't so important is that
we are terrible at it. According to John Bogle at Vanguard, between 1980 and
2005, the average annual return was 12.3%, but the average investor earned
just 7.3%. Here we go again we love to buy high and sell during the fall of
08.Consider what Warren Buffet had to say about the last century and the
century ahead in his letter to Berkshire Hathaway shareholders:"Over the last century the Dow went from 66 to 11,497. While this may seem
like enormous growth on the surface, compounded annually, it's just 5.3% per
year. In this century, if investors matched that return, the Dow would close
at 2,000,000 by year end 2099."Two million? The Dow Jones Industrial Average at 2,000,000? I know that's
ninety years from now, but still. No one thinks the DOW will ever see two
million.The Oracle of Omaha went on to say this:"And anyone who expects to earn 10% annually from equities during this
century is implicitly forecasting the Dow to reach 24,000,000 by the year
2100. If your advisor talks to you about such double digit returns from
equities going forward, explain this math to him not that it will faze him.
Many helpers are apparently direct descendants of the queen in Alice in
Wonderland who said: Why, sometimes I've believed as many as six impossible
things before breakfast."Here are the facts about the markets:1. The return on the S&P 500 Index over the last decade was zero zip nada.2. Let's say you had retired at the beginning of 2000 when you were 65, and
you invested $1,000,000 in the S&P 500 Index on January 1, 2000, and taken
withdrawals of just 5% a year, or $50,000, to cover your retirement living
expenses. Today, you'd have something in the neighborhood of $300,000 by my
calculations a third of what you started with and you'd be turning 75 years
old.3. Although we enjoyed a bull market that lasted almost 25 years, from
1982-2005, prior to that we languished in a 16 year bear market from 1966 to
1982, during which the stock market's average annual return was -6%...
that's negative 6%. And that's according to Art Laffer, the man who's never
seen a tax cut he didn't love. (Sorry about that, Art.)4. Diversification is the cornerstone of Modern Portfolio Theory. Diversify
your investment holdings, that way if one investment goes south, the others
will reduce the impact of the loss. These ideas also appear to make complete
sense, but perhaps there's more to the equation than has been explained to
us in the past. Maybe conventional wisdom should be questioned. Why should
we accept losses at all?5. The biggest threats to your comfortable retirement can be thought of as
tax risk, longevity risk, and sequence risk. Tax risk is the risk that taxes
will be higher in the future, which will eat into your available income
during retirement. Longevity risk is the risk that you'll outlive your
money. And sequence risk is the risk of market downturns in the years
preceding or immediately following retirement. Taxes life expectancy market
downturns.The Real Question to AnswerWhen it comes to planning for your comfortable retirement, there's really
only one question you need to answer: How much money will you be able to
receive each month after you stop getting a paycheck from work? However, in order to answer that all important question, there are other
issues youll need to consider in order to understand something about
retirement. When you retire, you move from the accumulation phase, and into
the income distribution phase. And that changes everything because taking
withdrawals from whatever amounts youve accumulated becomes mandatory its
your income. So, even if youre invested in the stock market, and diversified
properly, and are only planning to withdraw 5% a year from a $1 million
portfolio that year the S&P could return -22%, so after taking out your 5%,
your portfolios value will have dropped 27%. And its likely that youll never
recover your nest egg will run out before you do just because of one years
negative returns in the all-powerful stock market.You need to focus on the cash flow your accumulated savings will provide
during your retirement years. And not just "maybe cash flow, but "for sure"
cash flow. The kind that used to be called a pension until the Wall Street
cabal convinced us, and our government, that the portability of
self-directed defined contribution plans was preferable to the stodgy and
oh-so-dull defined benefit plans.I saw the movie "Jaws" when I was 12, and as a result was too scared to swim
in the ocean until I was 30. I saw the movie "Wall St." when I was almost
30, and as a result I've been losing so much money to land sharks ever since
that now I can't even afford to vacation in a locale where I might be eaten
by a real shark.It's been a rocky ride, these past 25 years, to say the very least. We've
had some good years and some utterly ruinous ones. And only the eternally
disingenuous, self-delusional, and ethically bankrupt pricks who brought us
the economic collapse in which we now find ourselves could possibly still
have the chutzpah to be perpetuating the idea that the stock market is where
we should all be investing our retirement savings. It's beyond being merely
bad advice its absolute claptrap. The stock market is equivalent to
gambling, pure and simple except you don't get the free drinks like you do
when gambling in Las Vegas.We all need to come to terms with the fact that WE and by we I do mean you
are at best nothing special when it come to investing, and that even though
we may have a financial advisor whose personality we may think we like it's
OUR money and OUR job to make sure we dont lose so much that we dont reach
OUR goals.You might remember the definition of a bull market: A temporary condition
that makes investors feel like geniuses. We need to stop listening to smart-sounding drivel from people in snappy
suits about the markets historical average returns, because historically,
nobody has ever earned them. And we better start paying attention to the
ubiquitous phrase that follows those historical perspective presentations
without fail: "Past performance is no assurance of future results. I think
we should add a few phrases to such disclaimers, like how about: Returns
shown in slide shows are smaller than they appear.In the U.S. alone there are more than 3.5 trillion books on "how to become a
better investor" published each year. That's more than the number published
on the subjects of "diet and exercise," and roughly the same number written
about Real Estate investing in 2007 that claimed it as eminently safe.Haven't we learned enough by now? Are we simply doomed to continually give
back all of our gains and then some every few years until our portfolios
would have performed better had they been left inside a Simmons Beautyrest?
Are we that pie-eyed? Greedy? Short-term memory loss? A learning disability?
Restless leg syndrome what's the deal? We have to have learned better by
now, right?Oh sure our "light bulb" is on alright but even with market meltdowns,
irrational rallies, Jim Kramer, and unemployment continuing to go in the
wrong direction and now Americans with dollars soon to be used in some
countries as memo pads, too many of us are still sitting at home using that
light bulbs glow to read the list of "Hot Stocks for 2010," in Rich & Richer
Magazine.Again? Seriously?Look, I'm no financial genius, and at 48 years old Im not claiming to know
everything about retirement. But I'm damn positive about one thing: Running
out of money at 83, and living until 93, would be... let's just say "far
from ideal" and leave it at that.So, why don't we do something about our situation? Change our ridiculous and
irrational behavior. Dump our investment funds that, in truth, we know
nothing about, and start saving for our retirement years through vehicles
like annuities that offer guarantees that limit our losses in down years,
and life insurance policies that can provide us with a source of funds that
can be accessed tax-free.Why that's an easy question to answer: We can't... not right now, anyway.
Maybe when the markets come back don't want to miss the "bounce" don't you
know!Well, alrighty then. I guess all I can say is: Hit me. And bring me another one of those cocktails with the little
umbrellas in them, would you? Viva Lasfriggen' Vegas, Daddy-O! Oh, and its
split the sixes, right? Right.Mandelman out.Ergo bibamus.Martin Andelman is a staff writer for The Niche Report. He also writes an
almost daily column on Ml-Implode.com called Mandelman Matters. He also
publishes a Monthly Museletter and you can follow "Mandelman" on Twitter.
Send your reponses to martin@nichereportonline.com. Promote your business and
services online and offline, find out when our next mixer is.Connect with other successful
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conventional wisdom about retirement investing from a slew of financial
advisors. Here's how it goes:Invest in equities, through quality mutual funds, diversify properly
relative to your tolerance for risk, hang in there for the long-term dont
panic and everything will work out fine you'll achieve your financial goals
and enjoy a comfortable retirement. Or something very close to that, right?Basically, ever since Oliver Stone's movie Wall Street, we've all been told
that the stock market will go up and it'll go down, but over the "long-term"
were all but certain to do better investing there than anywhere else.Today, something like 75% of all Americans are invested in the stock market
in one way or another, and they do so believing that this is the path to
accumulating the amounts they need to retire comfortably. Americans invest
in the stock market through their employer-sponsored retirement plans, their
IRAs, their pensions, insurance policies, and more. It's become accepted
conventional wisdom: If you want to invest for the future, you need to have
most of your savings in stocks.It seems like a maxim thats been around since Aesops Fables, but thats
simply not the case.Consider that in August of 1982, the Dow Jones Industrial Average hit 772,
but by that year's end, an interest rate fed Bull Market was born and it
would last for an astounding and unprecedented quarter of a century. On
October 9, 2007, the Dow Jones Industrial Average closed at a record
14,164.53.Seven hundred and seventy two to fourteen thousand and change? Now, thats
what I call a bull market. So, what is the definition of a bull market? That one is easy. Mandelmans
Dictionary defines bull market as: A temporary condition that makes
investors feel like geniuses.Well, the proverbial jury has now been in for some time and I'm sorry to say
that the news is not good: We've been lied to. Deceived. Misled.
Manipulated. And, as a result, our ability to save the amounts we need to
retire comfortably is well, shall we say somewhere between lacking and
nonexistent. We've been confounded by charts. Stunned by statistics. And
buffaloed by B.S.Avoiding Future Financial ShockIf you're under forty years old, chances are there's no talking to you about
investing for your future. If you're over forty, you're looking at 65 as
being just around the corner, and it's now critically important that you
take a moment to take stock. No, not buy stock JP, I said take stock.As baby boomers, our retirement years are approaching faster than any of us
wants to think about. If you don't start to scrutinize your views on, and
skills related to investing for your future years, then what's in store is
likely to come as quite a shock. To avoid that future shock, we need to
better understand how we all got here, so we can change the way things go,
going forward.Understanding BubblesWe seem to have a love-hate relationship with bubbles. It all started in
mid-1980s, when "greed was good," corporate raiders were modern day cowboys,
and junk bonds meant that money was flowing through Wall Street like lava
from Mt. Vesuvius.Of course, much like what happened when Vesuvius erupted above the town of
Pompeii in 70 AD, it all soon came to a standstill. The "Black Monday"
market crash of October 1987 signaled the end of an era. Drexel Burnham
Lambert, Mike Milliken, Charlie Keating, Ivan Boseky, and the other names
that had by then permeated our lexicon as being leaders of American
business, all ended up to be major disappointments, to say the least. The
bubble popped, S&Ls went under, and suffice it to say it was a real mess
that was certain to trigger a bad recession. All of a sudden we went from
thinking that having a new BMW was cool, to viewing a mini-van and a savings
account as much cooler.Then, after weathering the recessionary storm of the early 1990s, we saw
little company named Netscape go public, and soon three initials were on
everyone's mind: I, P and O. Everyone was "doing it". We heard stories of
business plans written on napkins by college drop-outs raising innumerable
millions, our neighbors all seemed to have bought Cisco Systems at $6 a
share, and tiny AOL, who was attempting to wallpaper the planet with free CD
ROMs would soon be buying out media mega-giant Time Warner.It didn't make a lick of sense to many people, me included, but the stock
market was flying high, a "new economy" had supposedly arrived, and early
retirement became the buzzword of the day. Cab drivers were day trading, and
just about everyone over the age of 18 had a stockbroker on speed dial.
Never mind that Alan Greenspan was warning of irrational exuberance and
Warren Buffet was sitting on the sidelines. Never mind that the companies we
were investing in didn't make any money. Other people at least appeared to
be getting rich, so in the spirit of Sutters Mill, we jumped in with both
feet.Then, on April 10th, 2000, the bubble popped again. American consumers lost
$7.3 trillion as a result, and prayers rang out across the land. We promised
God that we would only buy bonds for the rest of our lives, if Cisco would
just come back to $84 a share, even for a moment. IPO, as it turned out, didnt just stand for Initial Public Offering. It also
stood for: It's Probably Overpriced.When the dot-com bubble popped in 2000, the United States was plunged into a
recession that many feared could become quite serious, as the prospect of
"deflation" came into view. But, the Federal Reserve under Greenspan,
determined to avoid a replay of the 1970's economic malaise, lowered rates
and opened the floodgates of capital. Almost overnight, real estate became
our savior-du-jour, and soon it would be our homes that would save us from
ourselves. Someone that lost his or her bet that Amazon.com would reach $400
a share, could still be assured a comfortable retirement simply by owning a
home and perhaps investing in a duplex. Or, as my good friend Ernie Banks of
the Chicago Cubs might have said back then: Its a beautiful day for an open
house Lets buy two. (Sorry Ernie, I couldnt help that.)"Real estate is by far the safest investment you can make. Housing prices
will never fall like share prices." That was the thinking way back then,
remember? "Pets.com may go to zero, but a house simply can't do that."People ignored anyone suggesting that yet another bubble was in the making.
And when I say people, Im including the Chairs of the Federal Reserve Bank,
among countless others. The fact that housing prices had fallen after
previous booms, such as in 1990, didn't seem to matter. "This time is
different", was the thinking of the day. Of course, that was exactly what
the stock market analysts had said in the latter half of 1990s, but we
didn't seem to remember that far back for some inexplicable reason.Here's what the venerable Economist magazine printed in May of 2002:IF THERE is one single factor that has saved the world economy from a deep
recession it is the housing market. Despite the sharp fall in share prices
and a worldwide plunge in industrial production, business investment and
profits, consumer spending has held up relatively well in America, supported
by low interest rates and the wealth-boosting effects of rising house
prices. Over the 12 months to February average house prices in America rose
by 9%, the biggest real increase on record in America.Yes, we were all blowing hot air into yet another bubble and by 2005 that
bubble was approaching the size of Saturn. Here's what the Economist wrote
in June of 2005:PERHAPS the best evidence that America's house prices have reached dangerous
levels is the fact that house-buying mania has been plastered on the front
of virtually every American newspaper and magazine over the past month. Such
bubble-talk hardly comes as a surprise to our readers. We have been warning
for some time that the price of housing was rising at an alarming rate all
around the globe, including in America. Now that others have noticed as
well, the day of reckoning is closer at hand. It is not going to be pretty.
How the current housing boom ends could decide the course of the entire
world economy over the next few years.Never before in history of the world had housing values gone up so fast, so
much, and for such a long period of time. The rising property prices that
had helped prop up our economy after the dot-com bubble burst in 2000, but
it was about to get ugly.According to estimates published by the Economist in the second half of
2005:The total value of residential property in developed economies rose by more
than $30 trillion over the past five years, to over $70 trillion, which is
an increase equivalent to 100% of those countries' combined GDPs. Not only
does this dwarf any previous house-price boom, it is larger than the global
stock market bubble in the late 1990s (an increase over five years of 80% of
GDP) or America's stock market bubble in the late 1920s (55% of GDP). In
other words, it looks like the biggest bubble in history.Of course, by the time 2007 appeared on our calendars, the real estate
bubble had popped over a year before and many of us, for THE THIRD TIME,
were again trying to get the gum out of our collective hair. The economic
crisis we now face, as a result of the giant real estate bubble having
popped, has decimated our wealth, and has only just begun to destroy our
national psyche.So, three bubbles we're three for three. What's next? Are we waiting for yet
another GET RICH NOW, ASK ME HOW OPPORTUNITY, through which we can finally
catch up so we can retire in style? Or will we finally learn that we can't
afford any more of those fabulous, sure thing opportunities?It is the view of many self-proclaimed "experts" that it is we investors
that are the culprits. We, as the thinking goes, are our own worst enemy. It
is simply human greed that creates the bubbles that cause us such financial
harm. And therefore, since greed is here to stay, we are doomed to repeat
our past behaviors. But is this easily reached assumption really true? Are
we really just greedy opportunists receiving our just desserts as the
bubbles we create inevitably pop?The answer is unequivocally "let's hope not".There's no question that greed is an inherently human trait that we are all
capable of exhibiting under the right circumstances. But, to assume that
greed is what fuels our collective investor psyche in my mind is simply too
cynical, along with feeling like a conclusion far too easily reached.Consider, for example, that most of the people that saw their 401(k)
balances decimated as a result of the dot-com bubble's demise weren't being
greedy when they jumped on the technology bandwagon. Greedy people, one
would think, would be more careful more crafty. Greedy people don't leave
75% of their retirement investments in their own companys stock, and then
sink the rest into a technology growth fund. I would tell you that its not greed that drives us to our lemming like
self-destructive behavior. People jump on such bandwagons, not because
theyre greedy, but because they don't want to be left out of what everyone
else is doing, and from which many appear to be benefiting.Being left out sucks big time. We hated being left out in elementary school
and high school, and we don't like it any more as adults. No one wants to be
the one still looking for an empty chair when the music stops. The feeling
of being left out, like greed, is a basic human trait, but it's much more
commonly shared than greed. There are unquestionably some among us that are
greedy, but none of us relishes the idea of being left out.So, while we do provide the air that inflates our market's bubbles, it's not
being driven by all-too-human greed. We are simply trying to ensure that we
are not left out of a party to which so many of our peers appear to have
been invited.Human traits, such as greed are not things we can change such traits can
only be controlled to varying degree. However, human beings will never like
the feeling of being left out not even for a moment.With all of this in mind, it shouldn't be difficult to imagine how
investment bubbles keep happening around the kitchen tables across this
country. "Honey, we should buy more technology stocks Joe and Mary bought
more technology stocks why can't we buy more technology stocks?Or, more recently: "Honey, we should buy another house Joe and Mary just
bought another house Tom just bought a place in the desert everyone but us
has at least two houses shouldn't we buy another house? We don't want to be
left out!!"Left Out of a Financially Secure FutureDuring the technology bubble of the last half of the 1990s many of us were
contemplating an early retirement as a result of what looked like was
newfound investor prowess. Today, we're not entirely sure that we will be
able to retire at all, and few of us can remember the name of the last
stockbroker we used. Just try mentioning that you received a "tip" from a
broker at an upcoming social gathering and you'll quickly see how risk
averse we've actually become.Oh sure, we haven't appeared to be all that gun shy these last few years,
but that's only because we were floating around in the real estate bubble.
But make no mistake about it those that jumped into real estate were driven
by a need for the assumed relative safety of the real estate market. No one
thought investing in real estate could be overly risky because everyone was
doing it, and because houses, regardless of their purchase price, could not
end up being worth nothing, as was the case for shares of Pets.com and Home
Grocer.Those that got into real estate later in the game, however, did so not out
of greed but to ensure that they would not be left out. Numerous studies
conducted after the dot-com collapse support this hypothesis. For example,
many people reported feeling much less embarrassed about losing money on a
popular stock that half the world owns - like AOL or Yahoo - than about
losing on an unknown or unpopular stock. As long as everyone's losing or
winning we're okay with it.This is another example of why we're terrible at investing: We buy what's
"hot". All data shows that money flows into high profile mutual funds much
faster than the money that flows out of underperforming ones. As a result we
continually buy high, and sell low and it would seem are destined to do so.There are many other aspects of human behavior that impact our ability to
invest effectively. Some studies show that we're more scared of losses, than
we are happy about gains. Anchoring is the concept that shows that people
tend to place too much credence in recent market events and opinions, and
ignore historical, long-term averages and probabilities. And most of us are
just generally overconfident. Countless studies show that people generally
rate themselves as being above average in their abilities. We often
overestimate the precision of our knowledge, and our knowledge relative to
others.We're human, and therefore we're doomed?It would be easy to reach the conclusion that as flawed human beings we are
doomed to repeat our failures as far as investing or preparing for our
future goes, but I don't believe that has to be true. I believe that, by
understanding our inadequacies, we can overcome our established tendencies.The Solution: Change your view of what you don't want to be left out ofIt's time to take hold of the law of nature that dictates that we, as human
beings, don't want to feel left out, and harness its power to our advantage.
We can learn from the past if we want to.Consider this: What's the one thing, more than anything else, that you don't
want to be left out of: A comfortable retirement, right? Imagine being left
out of that. Imagine watching your friends and relatives vacationing
together, while you remain at home constrained by a budget far less than you
lived with throughout your working life. Perfect. Now that you have the time
to travel, you can't afford to. Imagine what it would be like to run out of
money long before reaching your life expectancy your last ten years of life
spent struggling to exist below the poverty line.Are you imagining the horror of that situation? Good. Now, compare that with feeling of being left out of buying Cisco Systems at
$6 a share, or not buying real estate when everyone else was. If the latter
is a pinprick, the former is amputation of both your arms and legs right?Once you realize that the most important thing not to be left out of is your
own comfortable retirement, you can begin to change your perspective on what
you need to do differently in order to make sure that you're not.Savings and Returns on InvestmentsThe first step is to save as much as you can, but for the purposes of this
article, that's a given. The next step, as any investment advisor will tell
you, is to invest those savings, within a certain tolerance for risk, in
order to maximize your returns on investment or ROI.That's what we're told, isn't it? If we are to reach our financial goals,
it's the long-term performance of our investments that reigns supreme? And
it makes sense, on the surface anyway. Of course you should take steps to
maximize your ROI, right? If you see one fund doing better than another, it
stands to reason that you should put your money where the returns are
higher, assuming the risk of doing so is not significantly greater. Doesn't
it?I'm not at all sure it does, how about that? In fact, I'm pretty darn sure
it's all a pile of crap. ROI is investment advisor horsepucky, nothing more.
Its twaddle, of the highest order.I'm going to tell you something you may not have considered before: Chasing
ROI is a fool's errand a waste of time essentially, its entirely pointless.Why? Why would it not matter what your ROI, or return on investment was? How
can that be? Is that what you're thinking? Because that is what you should
be thinking that's certainly what I would have been thinking before I spent
almost all of 2008 intensively studying the markets as related to retirement
investing. Now, I'm thinking very differently.ROI doesn't matter for several reasons. The most important one is that your
up years dont really matter nearly as much as you probably think they do. In
reality, it's the down years that kill you. If you had invested over the
last 25 years in order to earn just a 3-4% annual return every year and
never a penny more, but you could skip all of the down years chances are
you'd be a lot better off today.The other reason that attempting to maximize ROI isn't so important is that
we are terrible at it. According to John Bogle at Vanguard, between 1980 and
2005, the average annual return was 12.3%, but the average investor earned
just 7.3%. Here we go again we love to buy high and sell during the fall of
08.Consider what Warren Buffet had to say about the last century and the
century ahead in his letter to Berkshire Hathaway shareholders:"Over the last century the Dow went from 66 to 11,497. While this may seem
like enormous growth on the surface, compounded annually, it's just 5.3% per
year. In this century, if investors matched that return, the Dow would close
at 2,000,000 by year end 2099."Two million? The Dow Jones Industrial Average at 2,000,000? I know that's
ninety years from now, but still. No one thinks the DOW will ever see two
million.The Oracle of Omaha went on to say this:"And anyone who expects to earn 10% annually from equities during this
century is implicitly forecasting the Dow to reach 24,000,000 by the year
2100. If your advisor talks to you about such double digit returns from
equities going forward, explain this math to him not that it will faze him.
Many helpers are apparently direct descendants of the queen in Alice in
Wonderland who said: Why, sometimes I've believed as many as six impossible
things before breakfast."Here are the facts about the markets:1. The return on the S&P 500 Index over the last decade was zero zip nada.2. Let's say you had retired at the beginning of 2000 when you were 65, and
you invested $1,000,000 in the S&P 500 Index on January 1, 2000, and taken
withdrawals of just 5% a year, or $50,000, to cover your retirement living
expenses. Today, you'd have something in the neighborhood of $300,000 by my
calculations a third of what you started with and you'd be turning 75 years
old.3. Although we enjoyed a bull market that lasted almost 25 years, from
1982-2005, prior to that we languished in a 16 year bear market from 1966 to
1982, during which the stock market's average annual return was -6%...
that's negative 6%. And that's according to Art Laffer, the man who's never
seen a tax cut he didn't love. (Sorry about that, Art.)4. Diversification is the cornerstone of Modern Portfolio Theory. Diversify
your investment holdings, that way if one investment goes south, the others
will reduce the impact of the loss. These ideas also appear to make complete
sense, but perhaps there's more to the equation than has been explained to
us in the past. Maybe conventional wisdom should be questioned. Why should
we accept losses at all?5. The biggest threats to your comfortable retirement can be thought of as
tax risk, longevity risk, and sequence risk. Tax risk is the risk that taxes
will be higher in the future, which will eat into your available income
during retirement. Longevity risk is the risk that you'll outlive your
money. And sequence risk is the risk of market downturns in the years
preceding or immediately following retirement. Taxes life expectancy market
downturns.The Real Question to AnswerWhen it comes to planning for your comfortable retirement, there's really
only one question you need to answer: How much money will you be able to
receive each month after you stop getting a paycheck from work? However, in order to answer that all important question, there are other
issues youll need to consider in order to understand something about
retirement. When you retire, you move from the accumulation phase, and into
the income distribution phase. And that changes everything because taking
withdrawals from whatever amounts youve accumulated becomes mandatory its
your income. So, even if youre invested in the stock market, and diversified
properly, and are only planning to withdraw 5% a year from a $1 million
portfolio that year the S&P could return -22%, so after taking out your 5%,
your portfolios value will have dropped 27%. And its likely that youll never
recover your nest egg will run out before you do just because of one years
negative returns in the all-powerful stock market.You need to focus on the cash flow your accumulated savings will provide
during your retirement years. And not just "maybe cash flow, but "for sure"
cash flow. The kind that used to be called a pension until the Wall Street
cabal convinced us, and our government, that the portability of
self-directed defined contribution plans was preferable to the stodgy and
oh-so-dull defined benefit plans.I saw the movie "Jaws" when I was 12, and as a result was too scared to swim
in the ocean until I was 30. I saw the movie "Wall St." when I was almost
30, and as a result I've been losing so much money to land sharks ever since
that now I can't even afford to vacation in a locale where I might be eaten
by a real shark.It's been a rocky ride, these past 25 years, to say the very least. We've
had some good years and some utterly ruinous ones. And only the eternally
disingenuous, self-delusional, and ethically bankrupt pricks who brought us
the economic collapse in which we now find ourselves could possibly still
have the chutzpah to be perpetuating the idea that the stock market is where
we should all be investing our retirement savings. It's beyond being merely
bad advice its absolute claptrap. The stock market is equivalent to
gambling, pure and simple except you don't get the free drinks like you do
when gambling in Las Vegas.We all need to come to terms with the fact that WE and by we I do mean you
are at best nothing special when it come to investing, and that even though
we may have a financial advisor whose personality we may think we like it's
OUR money and OUR job to make sure we dont lose so much that we dont reach
OUR goals.You might remember the definition of a bull market: A temporary condition
that makes investors feel like geniuses. We need to stop listening to smart-sounding drivel from people in snappy
suits about the markets historical average returns, because historically,
nobody has ever earned them. And we better start paying attention to the
ubiquitous phrase that follows those historical perspective presentations
without fail: "Past performance is no assurance of future results. I think
we should add a few phrases to such disclaimers, like how about: Returns
shown in slide shows are smaller than they appear.In the U.S. alone there are more than 3.5 trillion books on "how to become a
better investor" published each year. That's more than the number published
on the subjects of "diet and exercise," and roughly the same number written
about Real Estate investing in 2007 that claimed it as eminently safe.Haven't we learned enough by now? Are we simply doomed to continually give
back all of our gains and then some every few years until our portfolios
would have performed better had they been left inside a Simmons Beautyrest?
Are we that pie-eyed? Greedy? Short-term memory loss? A learning disability?
Restless leg syndrome what's the deal? We have to have learned better by
now, right?Oh sure our "light bulb" is on alright but even with market meltdowns,
irrational rallies, Jim Kramer, and unemployment continuing to go in the
wrong direction and now Americans with dollars soon to be used in some
countries as memo pads, too many of us are still sitting at home using that
light bulbs glow to read the list of "Hot Stocks for 2010," in Rich & Richer
Magazine.Again? Seriously?Look, I'm no financial genius, and at 48 years old Im not claiming to know
everything about retirement. But I'm damn positive about one thing: Running
out of money at 83, and living until 93, would be... let's just say "far
from ideal" and leave it at that.So, why don't we do something about our situation? Change our ridiculous and
irrational behavior. Dump our investment funds that, in truth, we know
nothing about, and start saving for our retirement years through vehicles
like annuities that offer guarantees that limit our losses in down years,
and life insurance policies that can provide us with a source of funds that
can be accessed tax-free.Why that's an easy question to answer: We can't... not right now, anyway.
Maybe when the markets come back don't want to miss the "bounce" don't you
know!Well, alrighty then. I guess all I can say is: Hit me. And bring me another one of those cocktails with the little
umbrellas in them, would you? Viva Lasfriggen' Vegas, Daddy-O! Oh, and its
split the sixes, right? Right.Mandelman out.Ergo bibamus.Martin Andelman is a staff writer for The Niche Report. He also writes an
almost daily column on Ml-Implode.com called Mandelman Matters. He also
publishes a Monthly Museletter and you can follow "Mandelman" on Twitter.
Send your reponses to martin@nichereportonline.com. Promote your business and
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