Protect Your Family’s Wealth
Let’s say we’ve got a money-printing machine! We expect this machine to print $40,000 a year, and we will use this money to pay our household expenses. And, each year our machine will print 3% more than it did the year before. Now, let’s fast forward 25 years. Our machine has printed nearly $1.5 million. Wouldn’t this makes this machine our most valuable asset today?
YES!! WE are this money-printing machine … it’s our ability to generate an income. Interestingly, we don’t question having insurance for the things our money machine buys for us (like autos and homes), but what happens if we lose our money-printing machine? It stops making money! Who will pay our household expenses then? The peace of mind derived by knowing our family is protected is PRICELESS!
Are You Worried About the Stock Market?
As investors, we realize the stock market is a volatile place to invest our money … and with volatility comes loss. Remember the gasp-worthy loss you probably saw on your computer a few months back? When the financial markets are unsettled, investors naturally look for lower risk investments. The question becomes: Are we concerned about the return ON our money or the return OF our money?
We’ve made the decision to invest our hard earned cash in the market … we’re in the game. So, let’s stay in the game long term. We can lose ALL if we’re not careful where we put our money. The simple investment lesson here is: What goes up will come down.
Market Returns Might Surprise You
Why do so many people favor the stock market to build wealth? Some argue we can expect to earn 12% by investing in the market. This makes a lot of people (including me) tense. We cannot count on earning a 12% return from stocks! We’re going to earn more like 7%, and I’d argue it’s better to assume an average return of about 6% just to give a margin of safety.
What we’re taught about the stock market is risky: dollar-cost averaging, buy and hold, buy cheap stocks, and always be in the market. The last point has certainly been proven wrong … we’ve seen two declines of over -50% just in the last 19 years. Keep in mind, it takes a +100% gain to recover a -50% decline.
Financial crisis have been an unfortunate part of the industry since the beginning. It’s important to remember that average market performance is not normal. We can expect a correction (10% drop) in the stock market on average once per year. A bear market (a decline of at least 20%) occurs every 3½ years. It’s naive to think such events can ever be avoided, and nobody is going to guarantee us a 7% rate of return for decades.
Will the Stock Market Crash? Yes.
One minute the market is hitting record highs. The next minute BAMM we’re selling off. Stock market declines are inevitable. The current 10-year bull market is the longest in history. How much longer can the good times roll? What’s your guess? The risk of recession grows, and it will happen. The stock market can (and does) enter prolonged periods of declining value. Remember the early 2000’s and 2008 when we saw some very serious lows?
How Much Will a Crash Cost You?
Nobody knows when stocks will tumble. The only certainty is that they will eventually. Achieving significant stock market gains only to lose them when a disastrous event occurs is devastating and, really, unnecessary. Imagine approaching retirement and watching your portfolio be cut in half. We cannot predict future stock market returns, period.
Is Your Money Safe?
The short answer is … of course not. If you’re invested heavily in your 401(k) and the stock market tanks, you’re headed down with the ship. Some think if they’re invested in mutual funds, they’re way more safe than if they were invested in individual stocks. But, guess what? All of their money is still in the stock market!
No matter how much we plan, our income is likely less secure during a recession. More than any other time, this is the time to avoid debt. If we can’t meet our obligations, the repercussions are huge! Don’t lose your house or your car, and don’t be forced to sell assets at a loss.
Some of the best moves you can make in response to a bear market have nothing to do with investments. The single best investment we can make during a bear market is paying off debt. We won’t be earning a return in the traditional sense, but it will eliminate a guaranteed payout, which is virtually the same thing. By paying off our debt, we effectively lock in a guaranteed rate of return.
Paying off debt is one of the best ways to offset the negative effects of falling stock prices on our portfolio. If we have substantial liabilities, we may be better off liquidating some of our holdings and paying off our debts. This can at least leave us with a relatively stable balance sheet while the bear market roars.
Paying off your house may be another good idea. Hint: This is very effective if we are paying private mortgage insurance (PMI) on our loan. If you don’t have substantial assets to do this, you’re not alone – most of us don’t. We can show you how to eliminate the burden of mortgage debt (and high-interest credit cards), getting you as close as we can to the perfect plan.
If you own a traditional IRA, consider converting some or all into a tax-advantaged account. This will effectively reduce the amount of taxable income you must declare.
Cash is king in a downturn, but the bigger point is that we need liquid assets that hold their value. Paying off debt is one of the best “investments” we can make. Are you concerned that a bear market may be coming soon? If you are, what steps are you taking to prepare for it?
Learn & Apply the Power of Compound Interest
One of the fundamental ideas we try to promote is our savings should be invested for long-term growth. We use the magic of compounding to create a wealth snowball!
It’s important we maximize our returns for the level of risk we’re taking. If you can trade shares better than the market, then ‘playing the markets’ will boost your returns. But, remember, investing is not free. There are trading costs! Fund managers probably charge you 1% to 2% a year, and don’t forget about the transaction fees when they’re trading your account. Investment costs might not seem like a big deal, but they add up fast!