Here’s How The Stock Market Can Make or Break Your Retirement

The stock market doesn’t care for what you want or need. It’s a cold and heartless beast – I know, it’s unfair.

Some things don’t make me happy to say, but there is a lottery aspect to all of this: when you were born, when you retire, and when your children go to college. And you have no control over that.

Jack Bogle

The lottery that Mr Bogle is referring to is the luck of the draw: What will the financial markets be doing when you retire? If you retired in the early 2000’s, you we’re ‘in luck’. If you retired in 2007, you were ‘out of luck’.

One of the biggest risks that isn’t spoken about in the financial world, is sequencing risk. Although it may sound complicated, it’s probably one of the most simplest, yet underrated risks. The risk that you suffer investment losses early in your retirement years, which is a matter of luck, your odds of making it over the long run fade very quickly. In essence, the earliest years of your retirement will define your later years.

Don’t believe me? Let’s take a look at two retirees, David and Carol.

David, age 65, has accumulated $1,000,000 and is about to retire. His portfolio is invested in line with a ‘balanced’ portfolio, that is 60% in stocks, and 40% in bonds. David draws $50,000 (indexed by 3% each year) from his portfolio each year to help fund his retirement.

David

David experiences some losses early on in his retirement – three years in a row in fact. And within five years, his portfolio has been cut in half. Withdrawing funds when the market is down makes it even worse. Although David’s portfolio makes up ground in the following years, the damage has been done. By the time he reaches 85 years of age, his portfolio has collapsed. he withdrew a total of $1,255,843 from his original investment of $1,000,000.

Carol

Let’s now consider Carol. Carol also retires at the age of 65 with $1,000,000 in the kitty. Carol experiences the exact same market returns as David, however in reverse order. Here’s what her portfolio looks like:

By simply reversing the order, or sequence of returns, Carol has a vastly different retirement experience. In fact, by the time she is 88 years of age, she has withdrawn $1,721,323 and still has over $2,485,000 in her retirement portfolio.

It’s mind boggling. Two retirees with the same investment balance, same withdrawal rate, same investment time frame, same average returns. Yet one penniless, the other living a completely financial free retirement.

You can do all the things right, but if you, just for one second, need to start drawing on your funds when the market is spiraling out of control, there can be a devastating impact on your nest egg. For some, this may mean not being able to care for their loved ones, or fund the retirement they’ve always dreamed of. For others, it means not being able to send their grandchildren to an independent school.

The market doesn’t care for what you want or need. For this reason, your personal life and balance sheet have never needed to be been more connected. Be clear on what you want and why. Then make investment decisions accordingly.

It certainly helps when you have a life and financial plan mapped out. Sure, it’s unlikely to go to plan, but like every pilot has a route mapped to their destination, and when the whether changes, they know exactly where they need to go, how far they deviated, and what to do to get back on track.

Sequencing risk is real. And investors deserve risk management strategies that will help give them the financial freedom they deserve.

The Greatest Bubble In History

It was 170 years ago when Scottish journalist, Charles Mackay noted:

We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.

When people think about really, really ridiculous bubbles, the Dutch Tulip bubble of 1636 instantly should come to mind. It’s generally considered the first recorded speculative bubble.

Source: Wikipedia (click for larger image)

How did people even get excited about tulip bulbs!?

Tulips came completely out of nowhere, having been imported from Turkey in 1554. The tulip was different from every other flower known to Europe at that time, with a saturated intense petal color that no other plant had. They blew everyone’s mind, and ownership of them became a major status symbol for the elites.

As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market. Soon after, the Dutch created a type of formal futures market where contracts to buy bulbs at the end of the season were bought and sold. The Dutch described tulip contract trading as windhandel (literally “wind trade”), because no bulbs were actually changing hands.

By 1636, the tulip bulb became the fourth leading export product of the Netherlands, after gin, herrings and cheese. The price of tulips skyrocketed because of speculation in tulip futures among people who never saw the bulbs. Many men made and lost fortunes overnight.

People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. Such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, and buyers refused to show up to routine bulb auctions, the demand for tulips collapsed, and prices plummeted—the speculative bubble burst. Some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid.

Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.

– Charles Mackay

The ensuing rapid ascent of tulips became the very definition of the ‘greater fool’ theory in action.

Whether it’s tulips, property, stocks, weed, Beanie Babies, or Bitcoin (crypto), bubbles have been growing and popping for centuries, as far back as 1637 in the case of Tulip Mania. Since then, mainstream media has had a terrible track record of identifying bubbles accurately, and in real time. In fact, it’s probably quite the opposite.

Will we see another bubble in financial markets? Sure we will – I guess we won’t know it was a bubble until after it’s popped. Here are some of the greatest bubbles in financial history and their relative magnitude to each other.

Financial bubbles completely change the way certain investors approach financial markets and investing. I also believe some investors forget the main lessons of financial bubbles far too quickly.

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.

– Charles Mackay

Here are four tips to avoid a bubble:

  1. Don’t mind missing the party. The music always sounds good, until the police raid the joint. If something feels wrong, don’t join in just because it looks like everyone else is having fun.
  2. Focus on your objectives. Don’t get sucked into playing someone else’s game. If you focus on investing to meet your needs and circumstances, you will be less inclined to follow the crowd.
  3. Diversify. It is one of the most basic of investment principles, but one that people abandon too readily. If you spread your investments out sufficiently, you will minimize the impact of any one bubble bursting.
  4. Have an exit strategy. When you buy something, have a predetermined exit strategy. That way, if you are fortunate to see your investment go up, you won’t get drawn into holding on just because it seems to be getting more popular.
  5. Rebalance. This will help you execute tactics 3 and 4: As individual investments or asset classes rise, periodically trim them back to keep them in line with your planned mix. That way, a bubble won’t inflate an investment to the point at which it has an oversized impact on your portfolio.

Don’t say I didn’t warn you.

Source: Business Insider, Wikipedia, Forbes

Jack Ma’s Guide To Sanity And Success

There are no experts of tomorrow, only of yesterday.

– Jack Ma

In 1999, Jack Ma co-founded what would become a multinational behemoth specialising in e-commerce, retail, internet and technology – Alibaba.

He’s someone I’ve been following for the last couple of years. His wisdom and simple, yet powerful advice is invaluable. One of my favourite video’s is Jack Ma’s original sales pitch to 17 of his friends is his apartment introducing Alibaba, where he lay out his plan to compete with US internet titans.

In his pitch you gain glimpses of his long-term thinking, his vision, his hunger, his determination, and his work ethic. Most importantly you gain insight into his mindset. If you haven’t seen the video, here it is:

In his video he talks about the tech bubble, the fact that stocks will rise and fall, and that they need to pay a painful price in 3-5 years, yet it is the only way they will succeed – and oh how right he was.

20 years on, Jack Ma is sharper than ever. He recently presented at the World Economic Forum in Davos to pass on his advice to young entrepreneurs. Here are his top quotes:

1.

“Of course I was scared and had doubts [when I started Alibaba]. But I believed someone, if not us, would win. There are no experts of tomorrow, only of yesterday.”

2.

“In business, never worry about competition, never worry about the pressure. If you worry about pressure, don’t be a businessman … If you create value, there is opportunity. Today the whole world worries. That means there is great opportunity.”

3.

“Your first job is your most important. Not necessarily a company that has a great name but you should find a good boss that can teach you how to be a human being, how to do things properly, and stay there. Give yourself a promise: I will stay there for three years.”

4.

“How can we teach kids to be more creative and do things that machines cannot do? Machines have chips, but human beings have hearts … Education should move in this direction.”

5.

What keeps Jack Ma awake at night? “Nothing! If I don’t sleep well, the problem will still be there. If I sleep, I have a better chance to fight it.”

6.

“To manage smart people you have to use culture, the value system, they believe what they do. If you just want to use rules and laws and documents to control – that’s how you control stupid people.”

7.

“When I hire people, I hire the people who are smarter than I am. People who four, five years later could be my boss. I like people who are positive and who never give up.”

Whether you’re setting up a business, or setting up your family’s wealth, having a vision, being hungry for success, being determined, having the right work ethic, and most importantly having the right mindset is paramount. I believe there are 3 key steps in getting what you want:

  1. Know your outcome – be clear on what you want
  2. Know why you want it – purpose provides drive
  3. Take action – stop talking about shit and start doing shit

Take these three actions, and you’re ahead of 95% of the population. It’s a fact.

Source: WEF, YouTube

Stocks & Storytelling

It’s 1994. Iomega (presently Lenovo) is expected to release a product that will revolutionize the PC and storage world. The product is the zip drive – a floppy disk storage system. Like the one in the picture below…you know, the one that’s sitting next to your computer (NOT!).

The stock was hot. It began with a whisper, then to web forums, and eventually to Wall Street who were touting the stock to anyone that was breathing. The story was spreading and it was on fire. People who lived near the company’s factory in Utah, would drive by the factory on a Sunday to see how crowded the employee car park was. And if it was full, the story was, the company can’t meet demand – keep buying the stock! The stock gained 2,135% in one year. Eventually CD-Roms and USB drives killed the Zip Drive, and the company.

Story-telling. Once upon a time, investing began this way. Once the portfolio was built, data was used to market it – we like ABC Company because <insert reason here>, and we expect earnings to surprise to the upside. There was no evidence behind the decision making. It was a gut-feel. A hunch. A story. Eventually, investment professionals realised this game wouldn’t last forever. The narrative changed from telling stories about individual companies to telling stories about investment themes and managed funds – we like Europe because <insert story here> and ABC manager has a strong track record in this space, we expect strong upside from here.

These statements would imply anecdotal insight into the future of a company, region, fund, and ultimately, it’s stock/s.

A lot has changed over the last 25 years. Today, portfolios are constructed very differently. They are constructed using math, data and evidence. And story telling is used to market them. Unlike 25 years ago, the story would sell the stock, and if the data was compelling (after the fact), it would be used to market the stock/manager.

Some money managers still operate like its 1994. Other than a very small handful of managers, most are not very good at it (managing money). The difficulty for end investors and investment professionals selling these portfolios of stocks, is that investors can only identify the winners after the fact, which is of no use to anyone.

Here’s the latest (Australian) data showing the percentage of funds that under performed their benchmark.

Source: SPIVA

The numbers are quite staggering. This is not an Australian phenomenon, the numbers are similar all around the world. Click here if you want to see the rest.

So who should care? Every investor who sometimes confuses brains with bullshit stories should care. Investors should ensure their portfolios are built using evidence and data, not gut-feels and hunches.