Avoid Market Crashes

Jan15

Avoid Market Crashes

Investing in the stock market is both exciting and scary. The question is, does it need to be? Just about everyone who has had money invested since 2000 has seen multiple crashes and multiple loses in the 20%, 30%, 40%, or even 59% ranges.

I don’t know about you, but losing significant amounts of money in the stock market isn’t much fun. It also significantly hinders your ability to retire as you want or if you are in retirement, large losses can significantly alter your living style.

In my opinion, the average investor is taking far too much risk in the stock market to achieve their investment objectives.

See if you agree with the following statement: Investors should take the least amount of risk to reach their investment goals

I really can’t imagine anyone not agreeing with previous statement.

Did you know that the average drawdown risk (how much you can lose at any given time) on a daily computed basis of the S&P 500 is -19.13% and -13.48% on an annual basis? Does that sound like a low risk investment? Most mutual funds don’t fare any better (and many have an even bigger drawdown risk).

Did you know that most mutual funds have to stay invested in the stock market with 80% of their investable assets even when the stock market is crashing? Even if the mutual fund manager knows the market is crashing, the best he/she can do is to go to 20% cash. How does that protect investors?

Managing Downside Risk

Did you know that there are managers out there that base their investment philosophy on first avoiding market downturn and second reaching for sustainable growth?

Did you know that when you use tactically managed investment strategies (vs. off the shelf mutual fund like most stock brokers use), the managers can go to an all cash position when they determine the market is crashing?

Did you know that there are managers out there that have audited returns with few if any down years going back 5, 10, 15, 20+ years with returns that have beaten the S&P 500.

My favorite manager has an audited track record of no down years in 21-years with a net average rate of return in excess of 9% (year ending 2012). How can this be achieved? It’s simple, first manager the money to avoid large downturns and make sure you are in the market when it turns positive.

The “Average” Investor

Many investors think they can time the market. The facts prove otherwise. The average investor has earned only 4.25% as an average rate of return going back 20 years (year ending 2012) while at the same time the S&P 500 has averaged just over 8%. Why? Because the average investor is really good at selling too late (after the crash has taken hold) and buying too late (buying after the market has had a significant upturn).

It is for this reason that very few “average” investors (which is just about everyone) should be managing their own money.

Local Stock Brokers/Financial Planners

If my previous assertion is correct, then it would make sense to use a local stock broker/financial planner to manage your money right? Not if you want to avoid stock market crashes. Most advisors recommend the use of mutual funds and/or index funds to help clients grow wealth. As previously stated, such funds can’t protect a client from stock market crashes. Some advisors will recommend the use of an “asset-allocated” portfolio (usually based on the Modern Portfolio Theory). Such an investment strategy will still risk a significant amount of money to stock market crash and when the stock market does well, such a platform depresses the gains. Therefore, in my opinion, going to your local money manager is going to not going to help you “take the least amount of risk to reach their investment goals”

Learning more….

When you read Chapters 2, 3, and 4 of Peace of Mind Planning: Losing Money is No Longer an Option, you will learn how to quantify the risk of your investments and about tactically managed strategies that manage risk to the downside. Once you read these chapters, you’ll understand how much risk you’ve been exposing your money to and why it will be imperative for you to seek out tactical money managers to help you grow your wealth with the least amount of risk.

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