Investing is not gambling but I like to use the game of Blackjack as an analogy for investing. I like to play Blackjack because it has better odds than most games at a casino. There is also some skill involved. If you play the game well, you can improve your odds.
The key thing to understand in playing Blackjack is that the most important factor is not the cards that you are dealt. The cards that the dealer has been dealt are much more important. Your strategy in Blackjack should be based mostly on the card that the dealer is showing in each hand.
But even if you play Blackjack well, the odds are in favor of the House. The House always wins in the long term.
Investing is different. When you invest in the stock market, the odds are actually in your favor in the long run. While it does not go up in a straight line, the stock market does always go up. But you need to invest in the stock market the right way.
The best large cap index funds have average annual investment returns of between 9% and 12% per year over 20-, 30- and 50-year time periods. Investing in funds like this that have consistent and reliable long-term rates of return is the first way that you can put the investing odds in your favor.
Yet, most people do not invest this way. They put money into international stock funds that return about 5% per year. They put money into small cap stocks that earn about 7% per year. They put money into bond funds that earn 3% to 4% per year.
People are told to invest this way by the industry “experts”. The experts say that investing this way reduces risk and smooths out your returns. If lowering your investment returns is a way to smooth out your returns, I guess this is true. But the objective of investing should be to get higher returns, right?
In 2022, people learned the hard way that following the advice of the industry experts does not lower risk. These “balanced” portfolios lost just as much as all-stock portfolios in 2022.
The other way that our investing system puts the odds in your favor is by investing aggressively in the stock market when the risk of loss is low and getting out of the stock market when the risk of a crash is high.
Like my Blackjack analogy, we determine our investing strategy based on what the market is doing not just what we are holding.
Using market averages and probabilities, the stock market is in an uptrend 84% of the time. In these growth cycles, the S&P 500 is generating annual returns of 15% per year. The odds suggest that you want to be invested aggressively in the stock market most of the time.
However, in the down times that represent 16% of stock market cycles, the market is falling at a rate of 39% per year. These crashes are devastating to your retirement accounts.
Our approach captures the high returns during the up cycles and avoids most of the losses during market collapses.
It is actually that simple. Makes a lot of sense, right?
The key is knowing which market cycle we are in at any time. I invested the better part of a decade figuring this out. It was anything but easy. But our system/approach works better than any other approach I have ever utilized. And I have tried them all.
It is not perfect, but better investing does not require perfection. Nothing is perfect. Better investing just depends on putting the odds in your favor.
Happy Investing,
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.
It seems like people are pretty nervous about the stock market right now. A lot of people are seeking us out for the safety and protection we offer investors. I am hearing a lot of comments from people about the market being overvalued.
Are they right? Does anybody really know the answer to these questions?
The two biggest macroeconomic risks are still the risk of recession and the risk of inflation. We have been dealing with the inflation risk for two years and the recession risk for about a year.
If the worst case happens for both of these risks, the market will definitely take a big hit. Entering a recession would likely lead to a 25% to 30% drop in stock prices from the current levels. An uptick in inflation would lead to continued tightening from the Fed, increasing the chances of a recession.
But recent inflation news has been positive, and the economy keeps chugging along. GDP growth has been excellent, and unemployment is still at all-time lows.
I like to look at history for some of these answers. If we exclude the pandemic driven mini recession of 2020, it has been about 15 years since our last “business cycle” recession. Before 1990, recessions occurred about once every four years. Since 1990, recessions have occurred about once every nine years. Some people say we are due for a recession.
Our proprietary MARKET VALUE INDICATOR (graph below) suggests that the S&P 500 (the best barometer of the stock market) has moved into “overvalued” territory this year. The rapid increase in stock prices since November of last year to March 1st this year has taken the indicator from a level that was “undervalued” by 10% to being “overvalued” by 6%. But please note that we do not do any trading off of this indicator. It is not a predictive indicator because the stock market is so irrational. It is just a guide.
The reality is that these market and economic risks always exist for stock market investors. And, unfortunately, most of the risks come from unknown factors.
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.
The biggest risk as I see it for most investors has nothing to do with the economy or markets at all. The biggest risk is you.
There is a risk that you’ll abandon your investment plan and make a big mistake at the worst possible time. 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.
This is why I created the Beyond Buy & Hold system. The only way to win in the investing game is to focus on the long-term. We can be quite confident that the stock market ten years from now will be much higher than it is right now. But nobody knows what stock prices will look like in six months or one year.
The best investors need 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.
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.
Changes to your investing strategy based on short-term reactions that are not based on proven and tested data will hurt your investing results. You need a disciplined and proven system to win in the investing game. Stay disciplined my friends.
Happy Investing,
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.
HOW MUCH SHOULD YOU CONTRIBUTE TO YOUR 401K?
This question is a primary concern of most 401K investors. This question creates anxiety in most 401K investors.
You are probably unsure about the answer.
We are not going to be able to provide you with the full answer today, but we want to start you down the path to answering this question and to becoming confident that you will have enough money to retire comfortably.
Like most of these questions, the answer is “it depends”. The answer is specific to each individual and it depends on a variety of factors:
The age at which you started contributing to your 401K.
Your current age and account balance.
Your investment strategy.
Your expected income needs in retirement.
Your expected increase in your income in your working years.
At the risk of oversimplification, today we are going to use simple examples to illustrate the two most important factors – the age at which you started contributing to your 401K account and your investment strategy. We help our customers with these calculations for the specifics of their individual situation.
If you start your 401K account in your twenties, you won’t need to contribute as much from each paycheck compared to starting in your forties. The compound effect of investments is more powerful when your money has more time to grow. Today, we will compare someone who started their 401K account at age 30 to someone who started at age 40.
The average 401K investor only generates annual investment returns of 5%. But most people in our audience pay more attention to their 401K and use some version of a Target Date fund based on the Asset Allocation model recommended by the investment industry. We will assume, therefore, that most people are generating investment returns of about 6.5% per year - still not very good but better than average.
We also used 3% for the company match amount. This is the average company contribution percentage.
Our objective in this exercise was to replace current income in retirement. The assumption is that Social Security will cover the impact of inflation in the future. Again, everyone’s situation is unique, but we wanted to use reasonable assumptions to illustrate the key points.
In the table below you will see that someone that starts contributing to their 401K at age 30 and uses a Target Date fund for their investment approach, needs to contribute about 7% of their income to their 401K each year to replace their income in retirement. This is close to the 6% average contribution percent for 401K investors. So, starting early only requires a modest contribution.
The person who waits until age 40 to open their 401K account needs to contribute much more to replace their income in retirement. If they use the Asset Allocation approach (Target Date funds) like the 30-year-old, they will need to contribute 20% of their income to their 401K. This is probably not doable for most people and clearly demonstrates the benefit of starting early with your 401K account.
Starting at age 40 or later will require a better investment strategy to reach your retirement goals. In the table, we compare how much the 40-year-old will need to contribute if they utilize a more aggressive growth strategy for their investments. With a better investment strategy that generates higher returns, the 40-year-old can reach the same retirement income level by contributing 13% of their income versus the 20% needed for the Target Date fund approach. The 13% figure is still a challenging contribution level, but it is more doable than 20%.
The 40-year-old can rescue their retirement by using our Market Signals investment system which would only require a 6% contribution to reach the same retirement income level.
If you start contributing to your 401K account after age 35, you absolutely need a better investment strategy to make up for lost ground. An aggressive growth strategy helps all 401K investors, but it is very important for the people who start later. Our Market Signals system is ideal for people who are running behind with their retirement accounts.
Happy Investing,
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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