Investing is hard. Investing is frustrating. Investing is even more difficult when fear guides your investment decisions.
If you are in retirement or near retirement, you know that stock market declines can change your financial future significantly. Yet, you also need to generate high investment returns to support your income in retirement.
The risk of stock market meltdowns is the price of admission for investors. No one ever knows the timing or the magnitude of recessions or bear markets, but you know they will happen at some point. Those risks are ever present even if they don’t happen very often.
How you deal with the fear of investing in the stock market is one of the biggest determinants of your success. Fear and greed cause most people to make poor decisions.
Guessing at what is going to happen or listening to someone predicting what is going to happen rarely works out. Even if you get lucky and reduce your stock exposure at the right time, you will lose because you won’t get back into stocks at the right time.
Holding bonds in your portfolio is not the answer either despite what the industry professionals say. The data is very clear on this. Bonds will only drag down the investment returns of your portfolio and they don’t always provide downside protection.
Investing in gold also won’t help. It does go up sometimes during stock market collapses, but it performs significantly below stocks the other 85% of the time.
Holding different kinds of stock market investments won’t protect you. When the broad stock market declines it affects all stock investments. Small cap, mid cap and international stocks all take a hit.
The investment industry’s only solution to this problem is the tired, old Buy & Hold strategy. They tell you to just “ride it out”. They are correct when they say stocks will recover, but sometimes that can take seven year or more. And watching your life savings get cut in half is painful. And older investors don’t always have time on their side.
What is one to do?
The right way to handle this challenge is having a proven strategy and a disciplined process to investing.
This is why I created the Beyond Buy & Hold system.
The best investors have a disciplined approach to owning the best funds and a proven quantitative system to avoid the worst of bear markets. Our MARKET SIGNALS investing tool gives investors just that. It puts the odds in your favor. It captures the large stock market gains in up markets and protects your savings in down markets.
The stock market is in an uptrend 85% of the time, growing at double digit rates. You want to be aggressively invested (100%) most of the time. Having a proven system to sidestep the bear market crashes gives investors the confidence to invest aggressively in the stock market.
You don’t have to worry when you know you have a system to avoid the damage caused by bear market crashes. Imagine investing in total confidence and without fear of the next market collapse.
If you want to learn more about Market Signals, click the link below to set up a free consultation. As part of the no obligation process, you will also get a free set of projections for your retirement accounts along with recommendations on how to improve your investing results.
You have nothing to lose and potentially millions to gain.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
I know we have some aggressive growth investors in our group. Aggressive growth investors are willing to take on a bit more risk to achieve investment returns that are above average.
When I think about aggressive growth funds, I use the S&P 500 index funds as a reference point. The S&P 500 index delivers solid growth for all investors – roughly 10% per year. But aggressive growth investors are looking to generate even higher returns. They want to beat the returns of the S&P 500.
Once again, I will only be focusing on funds here. As you know, I do not recommend buying individual stocks. You have to get lucky picking stocks to beat the best funds in the long term. Only a handful of people on the planet can do that consistently. You are not one of them.
There are several funds that can generate higher returns than the S&P 500. And almost all of them have a technology focus.
Since I will only be covering growth funds that have a long track record of success, these funds don’t carry much more long-term risk than the S&P 500. But they all carry a higher risk of short-term volatility. While you can be pretty confident in their long-term returns, their short-term results will be more volatile than the S&P 500. For example, the Nasdaq index funds that have a higher concentration of tech companies declined by 30% in 2022 compared to the 19% drop in the S&P 500.
Aggressive growth investors simply need to be prepared for more short-term volatility.
A good place to start for aggressive growth investors is the Nasdaq. Both the Nasdaq and the Nasdaq-100 have 50% of their assets invested in technology companies compared to 30% for the S&P 500. Both the Nasdaq and the Nasdaq-100 are index funds. This means that there is no stock picking in these funds. They are managed by a computer which automatically mirrors the index they are following.
All of the other funds listed below are mutual funds. This means that a fund manager manually picks the stocks that are in the fund. Based on their ongoing analysis, they are constantly buying and selling individual stock holdings.
All else being equal, I much prefer index funds to mutual funds. Stock pickers don’t typically perform as well as the best index funds. The mutual funds below have strong performance mainly due to their industry concentration and not their stock picking in my opinion. Technology companies have performed extremely well over the last 30 years so most funds that have invested heavily in tech have also performed well.
The table below compares the 30-year and 20-year investment returns of some of the best growth funds. It also includes the percentage that each fund has invested in the technology sector. While the S&P 500 holds 30% of its assets in technology companies, the Vanguard IT fund holds 99% of its assets in tech.
When I want more growth, I stick with the Nasdaq-100. Very few funds can beat its performance and the ones that do carry more risk.
Using a loss protection system like our Beyond Buy & Hold Market Signals product is really important when you are invested in aggressive growth funds. Aggressive growth funds have dropped by over 70% on occasion. With Market Signals you can capture the upside of aggressive growth funds and also protect yourself from big losses in bear markets. Combining an aggressive growth fund strategy with our Market Signals system provides investors with the potential to earn well over 15% per year.
I did include a non-tech mutual fund on the list – Baron Retail Partners. They are the Unicorn in the mutual fund industry – the one team that can consistently pick winning stocks. Their performance for every time period below beats the Nasdaq-100 and they do this without a narrow focus on sectors like technology.
I have two concerns with this fund.
The first concern with this fund is that they tend to place big bets on a limited number of stocks. The often hold 50% of their assets in just one stock. This is how they achieve their exceptional results, but it does make this fund riskier.
Another way that Baron’s generates above average returns is through the use of leverage. Leverage means debt. Baron’s borrows money to invest in stocks. Investors that borrow money amplify their returns when stocks are rising. But leverage introduces more risk because leverage amplifies losses on the way down.
Personally, Baron’s is too risky for me. But I can’t argue with their track record of consistent performance.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Risk is a big focus in the investment industry. But I don’t think the industry does a good job communicating the really important risk factors for investors.
In addition to the standard disclaimers that investment professionals need to communicate (past performance is no guarantee of future results, etc.), the typical approach of the investment industry is to create a risk profile for each investor. They run everyone through a series of questions to measure an individual’s risk tolerance.
This is basically a measure of how well an individual investor can deal with the “buy and hold” strategy. They want to know if a person might panic in a stock market collapse. This part of the process is a good thing. It’s important to know if some investors can handle investing in the stock market or not. Some people cannot stomach even small short-term losses to their accounts, and they would not be good candidates for stock investments.
Someone with a very high risk-tolerance (not afraid of short-term losses) would be set up with a more aggressive investment strategy consisting of mainly stock market investments. Someone with an average risk tolerance score would be set up with a less aggressive strategy such as a blend of stocks and bonds.
It all sounds very scientific and professional. But this process creates a perception of exactness and control that is extremely misleading.
First, the process leads one to believe that investment professionals can control the results and truly minimize risk-- that they can somehow dial in the perfect asset mix for an individual, so that they achieve a specific investment return tied to a specific level of volatility and risk. But that simply isn’t possible.
Secondly, risk profiling depends upon asset allocation being an effective strategy. Since asset allocation doesn’t work, building risk profiling on top of it is just silly.
The investment industry is providing an illusion of safety—not a real solution.
Too much time is spent by advisors on risk tolerance and fear—and not enough time is spent linking different kinds of risk with the expected returns of particular investments. Some investments do carry a lower risk of short-term loss, but they also come with much lower investment returns. And the risk of short-term loss is very different than the risk of long-term or permanent loss. That distinction should be made very clearly.
Most of all, the risk of not choosing investments that consistently perform well over the long term is the biggest risk of all—the risk of missed opportunity—and the investment industry gives precious little attention to that risk.
Let’s talk about the different kinds of risks that investors really need to understand and consider when making investment choices. There are three kinds of risk that I would like to explore with you.
The first risk to consider is the risk of short-term losses from a particular investment.
The second risk to consider is the risk of long-term or permanent losses from a particular investment.
And the last risk, is the risk of generating low investment returns in the long term, which leads to insufficient retirement accounts when people reach the age of 65.
The investment industry usually lumps short-term loss risk and long-term loss risk together in discussions with clients. They’re two different things, and this needs to be understood by all investors.
Most investments other than cash or guaranteed income funds carry the risk of short-term losses, because all financial markets are volatile. The stock market can and does go up and down on a fairly regular basis. That risk is pretty well understood by most investors.
In 2022 and 2023, investors learned that bonds can and do lose value in the short-term. Financial professionals who do risk profiling will often move investors into bonds if their risk tolerance is low. Those investors were probably not expecting to suffer through short-term losses in their bonds of roughly 20% in 2022 and 2023.
There is a big difference, however, between short-term volatility—which produces short-term losses—and bad investments that lose money in the long term.
Long-term losses or permanent losses happen when someone invests in an individual stock and that company goes out of business or loses significant portions of revenue to a competitor. Long-term losses can also happen when someone invests in a stock fund that represents a particular developing country, and that country goes through political upheaval. Long-term losses can occur when a commodity like oil is replaced by another form of energy. 401(k) and IRA investors should avoid any investment that carries a high risk of long-term loss. Permanent long-term losses can destroy your retirement plans.
The last risk factor—the risk of low long-term investment returns— is the risk that’s not talked about enough. Bonds do provide a little less short-term loss risk than stocks. But that lower risk of short-term loss comes at a cost: investors are dramatically increasing the risk that they will not create an investment account with enough money to retire comfortably and securely. And investors need to know that lower short-term risk does not equal no risk. Bonds lost a lot of money in 2022 and in 2008.
If you look at long-term investment returns, there’s a huge difference in performance between bonds and the best stock investments. The best stock investments can produce average returns of 9% to 10% per year. Bonds, on the other hand, can only be expected to produce average returns of 4% to 5% per year—about half of the gains from stocks. This difference in performance means that a stock investor will end up with millions of dollars more in retirement than a bond investor.
Don’t lose sight of your long-term goals by paying too much attention to some useless risk profiling score.
Stay Disciplined My Friends,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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