Lessons About Investing for Retirement From a McDonald’s Franchise Owner

When market corrections occur and the value of your strategically allocated Retirement Bucket of investments declines, it’s extremely useful to put investing in perspective. 

Think about this for a moment…

Assume that thirty years ago, you took the carefully thought-out leap of faith to borrow the necessary funds to buy and operate a McDonald’s franchise (certainly a business we’re all familiar with).

Quite a leap of faith as all of your friends and co-workers thought you were crazy.  Not to mention your spouse!

After attending Hamburger University, and then suffering through a lot of bumps and bruises over the next 18 years, you reached the point where profits were good enough, and you had the confidence to purchase a second McDonald’s franchise.

Throughout the years, you’ve run your stores exactly as McDonalds suggests. You’ve carefully studied your marketplace. You’ve come to really understand and develop a level of confidence with each store’s cash flow during good and challenging economic cycles.  And your profits, while not explosive or in a straight line, have continued to rise over the years.

While it’s been anything but easy, you’re happy with the decision you made thirty years ago as owning these two McDonald’s franchises has provided a very nice income and lifestyle for you and your family.  And, it certainly appears to be able to do so in the future.

Your Big McDonald’s Franchisee Question

What if the person I just described who owns these two McDonald’s franchises was really you?

Imagine surfing the news on-line today and reading these current headlines from Yahoo Finance and Wall Street’s MarketWatch:

  • ”If You Weren’t Yet Worried About the Stock Market, You Should Be Now”, or
  • “Monday’s Nasty Stock Market Reversal is Evidence That the Worst is Far from Over for Wall Street”, or
  • “Here’s Where Investors Are Taking Shelter from Stock Market Turmoil and Fed Hikes”

Here’s your BIG Question: Would you scramble and search for the phone number of a business broker so you could put your two McDonald’s franchises on the market to sell immediately?

After all, the market has been pushing higher and higher to all-time highs, and it certainly looks and sounds like the “bubble” is about to burst.   

Aren’t we due for a big market correction?

What if the Fed changes course and begins to raise interest rates?

What if inflation finally kicks into high gear like the late 1970s after all the Covid relief stimulus money poured into the economy?

What if the new strand of the virus all the experts keep talking about takes hold and we have to go into lockdown again?

What if the gridlock in Washington continues and they can’t get a balanced budget passed?

What then??

Would your McDonald’s franchises survive? 

With a full-blown market crash and recession all but looming on the horizon, wouldn’t it be smarter to just sell your franchises and wait this thing out?  Then, when everything settles down and gets back to “normal”, you can buy another one.

Your Likely Answer

Given everything I’ve shared with you about the owner of these two McDonald’s franchises, I’m confident that you’re laughing right now and shouting out a resounding No Way!

If that’s true for you, why not?  Why wouldn’t you sell your franchises?

Well, to start with, you’re an owner!  You didn’t buy your McDonald’s franchises so you could buy and sell in and out of them in order to gain some sort of short term profit.

Second, you’ve lived through a lot over the last thirty years.  You know what you own.  You’ve seen how they perform during up and down market cycles, and your experience tells you that the long term impact on your McDonald’s businesses from any and all of these reported “crises” is highly likely to be next to nothing.

What’s the Difference?

So, what is the difference between you owning a McDonald’s franchise as I’ve described vs. you owning any investment you currently own?

Please take a moment to pause and really give some thought to this.

The only difference is if you choose to “operate” the McDonald’s franchise, i.e. “work in the business” on a day to day business.  However, many franchise owners own multiple units and don’t work “in” the business at all.

Aside from that, it’s exactly the same. 

When we all invest, what are we doing?  We’re all buying ownership shares of various companies.  That’s what investing is…ownership

And, we own and accumulate shares in many companies because we need to own assets that have the ability to rise in value over time and generate increasing levels of income (dividends) in order for us to maintain our lifestyle in a continuously rising-cost world. 

This is such a critical distinction for your future. 

When we listen to and watch the financial media on a day to day basis, and we listen to friends, family members, and co-workers talk about investing, this is not what we hear.

We hear them talk about “the stock market” as if it’s this mysterious and scary thing. 

The “stock market” is simply a mechanism to buy and sell ownership shares in thousands of companies throughout the world. 

That’s it. 

It’s a collection of thousands of enterprises whose current value and dividend levels will each rise and/or fall over time based on their ability to generate profit and income for their “owners.”

So, when you invest, you’re not “buying” the stock market, per se.  You’re buying an “ownership” stake in one, or hopefully in your case, thousands of companies just like buying a McDonald’s franchise.

And, buying and owning shares of well-run companies is a lifelong venture for everyone who has a goal of generating income that can keep pace with the rising cost of your lifestyle.

Download the PDF

Beware The Fatigue Factor and Magic Pill Pushers When You Transition to Retirement

Confronting something that requires a greater level of focus can be physically, mentally, and psychologically taxing.  The longer that required focus persists, the more taxing it can become.

A potential negative byproduct of this can be a “fatigue” factor kicking in, and the common and costly mistakes that can follow as a result.

This fatigue factor has definitely been known to kick in during times heightened stock market volatility, especially if a) you were not prepared and properly positioned with a long-term system to begin with, or b) you still “check out the market” several times each day. 

Those who fall into one or both of these camps are a perfect target for the Magic Pill Pushers who always emerge during heightened stock market volatility environments. 

Magic Pill Pushers

You can set your watch to it.  Each time stock market prices temporarily plunge, the marketing departments of two industries kick into high gear with Magic Pill solutions:

  1. Gold and other Precious Metals
  2. Annuities

Each of these is marketed as the solution to the “problem” of the volatile and “risky” stock market.  Before digging a little deeper into gold and annuities, the first principle to always keep at the forefront of our minds is that any attempt to suppress short term volatility correspondingly suppresses long term returns. (You may want to take a second to read that again)

Gold and Annuities

The popularity of any non-currency-based asset like Gold always rises during turbulent markets and ensuing government spending as the fear of rising inflation enters the equation.  While a strong case can be made for the fear of inflation, gold has been a terrible investment for those looking to outpace inflation.  Fortunately, a fairly simple Google search can demonstrate this. 

The same can’t be said for the history of annuities.  If you have been a steady reader of RETIREMENT GAME PLAN over the years, you know my feeling about annuities.  While they do provide a tool in your planning toolbox, for the most part, the overwhelming majority of annuities marketed today are very complicated, expensive, restrictive, and they are grossly oversold.  (One of the reasons they are oversold is they pay very large commissions to agents and advisors who sell them.)

Here’s an example of language used in a Jackson National Life annuity advertisement on page one of the Wall Street Journal during a recent market correction acknowledging this reality:

“Sound too good to be true?  It’s important to remember that unlike any other investment product, annuities were created by insurance companies, which have the unique ability to offer features and add-on options that help protect us against outliving our savings or having to drastically change our lifestyle in retirement.”

And then:

“Annuities have been available for a long time, and it’s true that they can be complicated to understand and even challenging for advisors to sell in today’s regulatory environment. But that should never be a reason for investors or advisors to forgo consideration of something so critical as guaranteed lifetime income.”  (I have taken the liberty of bolding this last sentence)

Doesn’t the phrase “guaranteed lifetime income” sound so attractive?  Who wouldn’t want that???

What is omitted in this advertisement is the cost to you for providing this “guaranteed lifetime income.” 


“There are numerous annuity options you can choose that can be customized to meet your needs.  For example, some annuities start paying a lifetime income stream immediately, while others allow that income stream to be deferred to a time in the future.  And with the purchase of a lifetime income benefit, an annuity is the only investment that can provide a steady stream of lifetime income unaffected by market downturns.  In fact, that income even has the potential to keep growing.”

As all insurance companies do when they market annuities, they are preying on the average American’s fear of financial market corrections and volatility which is a very effective marketing strategy on their part. 

You simply don’t want to fall prey to it!

As we have discussed in great detail, market volatility and corrections are nothing to fear for the rational, long-term investor if you employ a strategic plan.  Not only are they not something to fear, but intelligent investors welcome them!

Jackson National Life recognizes these realities, so the ad attempts to deal with them. 

The bottom line is to always have your eyes wide open when reading advertisements like this, and to beware of “magic pill” offers especially during times like these when the “fatigue factor” can easily kick in!

As much as we would all love a “magic pill” as this Jackson advertisement attempts to imply, there is no such thing.

Download the PDF

Four Market Principles All Investors Must Adhere to in Retirement

I have some thoughts to share with you today to help you continue to be a better investor so you can live the life you’ve earned. 

An unfortunate but true outcome during sharp stock market corrections is the transfer of ownership of a finite and fixed number of shares from those who were not prepared, and thus panic-sell out of fear, to those who were prepared and confidently buy shares at a significant discount. 

You may want to pause and read that paragraph again.

Despite what the financial media and large brokerage firms convey, investing is not a reactive “market-oriented” activity, but a strategic and proactive “goal-oriented” process. 

And, that goal-oriented process is based on market principles that we all have to keep at the forefront of our minds in order to avoid the common mistakes that occur during challenging market conditions:

  1. Markets work and they are working.  Although we may not like the direction they take at times, the great news for all of us is that markets work even during crises, and information is incorporated into stock prices.  We always have to remember that for every share of stock that is sold on a given day, there is a willing buyer on the other side making that purchase. 
  2. Stock prices adjust to the point where a buyer believes they can earn a positive expected return from that point forward.  Nobody buys a stock with the expectation of losing money.
    1. Think of it this way as an example.  At $100 per share, a buyer may not be interested because he or she may not believe the expected return from $100 per share going forward justifies paying that price.  However, if the price drops 20% to $80 per share, there is a greater likelihood of the buyer earning the expected return they want to justify the purchase price. 
  3. Stock prices are forward looking, i.e. expectations about the future have already been incorporated into the price.  In today’s day and age, what are the chances that you know something that millions of other market participants don’t know about a company?
  4. Volatility is brought on by uncertainty.  If there was no uncertainty, there would be little or no return, i.e. treasury bills.  Your ability to deal with short-term uncertainty, and thus volatility, is precisely what allows you to earn higher expected long-term returns.

With those principles firmly in our minds, stay tuned for the next edition where we will discuss one of the most common mistakes investors fall prey to during sharp market corrections.

Download the PDF

How to Reduce Your “Investing Pain” in Retirement

Is it possible that two different individuals can have the exact same investment allocation over a 43-year period of time, yet one experiences almost three times more investment “pain” than the other?

At first glance, you might think this is impossible.  If two individuals have the exact same investment allocation and they don’t buy or sell anything for forty-three years, shouldn’t they both experience the same amount of investment “pain?”

The answer will likely surprise you.

We recently examined stock market price movements during the “Great Recession” financial crisis between October, 2007 and March, 2009.  What this revealed was that during that 18-month stretch, if you “looked at” and experienced stock market prices on a daily basis, in addition to a lot of down days (54% of the days), there were also a lot of up days (46% of the days).

So, during that memorable 18-month market crash in which prices fell almost 57% from peak to trough (as measured by the S&P 500 Index), we also experienced prices closing up on 46% of the days!

Among other things, what that illustrates is that when dealing with markets, our experience is never a straight line up or down.  Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……

That’s how we experience markets.  But, only if we “experience” them on a daily basis.

How Often Do You “Look”?

How often do you “look” at “the market?”  Or, your investment portfolio?

Be honest!

With technology and the financial media today, it’s not uncommon for Americans to not only look every day, but multiple times during the day.

We have all been conditioned by the financial media to “look” so you don’t miss anything and get caught.

Unfortunately, this is leading to a lot more pain in your life!

During the 43 years from 1973 through 2015:

  • Daily: If you looked at and experienced “the market” on a daily basis, you experienced prices being up 53% of the time, and down 47% of the time.  If you add up all those days, you will have experienced “pain” (i.e. market prices closing down for the day) for 20.3 years out of those 43 years.
  • Monthly: If you were “busy” and only allowed yourself to look at “the market” on a monthly basis, the percentage of time you experienced “pain”, (i.e. market prices closing down for the month), fell to 14.5 years out of those 43 years.
  • Quarterly: If you had the discipline to only look at your Retirement Bucket of investments every three months, the percentage of time you experienced “pain”, (i.e. market prices closing down for the quarter), fell to 11.8 years out of those 43 years.
  • Annually: Finally, if you disconnected from all media for all but one day per year, the percentage of time you experienced “pain”, (i.e. market prices closing down for the year), fell to 7 years out of those 43 years vs. 36 years in which the value went up.

What this demonstrates is that two different individuals could have had the exact same investment mix over 43 years of their lives, yet the one who “looked” at it daily experienced almost three times more pain than the one who looked at it once a year (20.3 years’ worth of the pain of market prices being down vs. 7 years).

There are a few conclusions we can draw from this data.

First, if we choose to follow the financial media the overwhelming majority of Americans and look at market prices and our investment holdings every day (or throughout the day), we’re setting ourselves up for a lot of completely unnecessary pain.

As the statistics and our experiences confirm, if measured on a daily basis, market prices move up and down a ton.  However, if measured over the long-term (which is what you invest for in the first place), market prices and dividends have increased substantially over time averaging 7% per year greater than the rate of inflation.

Second, we can’t delude ourselves into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.  

In fact, as Dalbar’s 2020 Annual Quantitative Analysis of Investor Behavior illustrates, the average investor’s real-life results are significantly lower than markets have performed (while the S&P 500 index returned 9.96% annually over the last 20 years, the average equity mutual fund investor earned only 5.04%.)

How much of that awful investor performance do you think is attributable to and exacerbated by poor investment decisions brought on by “looking” at market price movements on a daily basis?

I would suggest a lot!

Finally, this does not mean that you should never look at market prices or your investment holdings.  As I suggested last week, go ahead and do so but during pre-determined periods of time, i.e. once a quarter, half year, or yearly so you can assess and rebalance your holdings back to your originally prescribed mix if necessary.

However, once you do so, go ahead and put it all back “in a drawer” and go about living your life.  Not only has history demonstrated that you will have better investment results, but you will also live a more enjoyable life!

Download the PDF

Retirement: Can You Now Just “Set it and Forget it?”

Let’s assume you’ve taken each step in The Relaxing Retirement Formula™ so far:

  1. You’ve determined just how dependent you are on your Retirement Bucket™ each year going forward (at least the next five years).
  2. You’ve calculated investment rate of return you must earn in order to have your Retirement Bucket™ remain intact for the rest of your life despite your rising, inflation adjusted And,
  3. You have strategically allocated your Retirement Bucket™ of investments to capture the higher expected long-term returns of a broadly diversified mix of index funds while exposing yourself to an appropriate level of risk and volatility.

Can you now do what Ron Popeil used to say when pitching his latest cooking gadget on television, i.e. “just set it and forget it?”

You would be better off than most investors during Phase One of your financial life, but not in Phase Two when you have no more paycheck from work to fall back on.

There are too many other considerations at play in Stage Two including:

  • Minimizing taxes with your:
    • withdrawal strategy, and
    • asset positioning strategy
  • Making sure your Retirement Bucket remains intact!

To ensure a consistent level of risk exposure and generate sufficient liquidity for your cash flow needs, the fourth D of investing is needed: Retirement Bucket Rebalancing.

Long-term academic research of markets has demonstrated that out of balance investment portfolios, with asset classes that have grown beyond their target allocations, take on inappropriate risk exposures.

And, your cash flow needs constantly change over time.

Given this, on a very strict timetable, objectively evaluate your current vs. your target Retirement Bucket™ allocation to determine if there is a need for strategic and disciplined Retirement Bucket Rebalancing.

Objective vs. Subjective Evaluation

The key word to focus on is objective.   The reason for this is that we have to remove our subjective emotions when investing. It’s challenging to do, but it’s imperative if you want to be successful.

You can’t leave it up to how you feel on a given day.

For an example, let’s contrast how you felt on two different days over a four month stretch:

  • December 24, 2018: broad market prices had just fallen between 20% and 26% from their prior peak only a few months earlier
  • March 29, 2019: broad market prices grew between 13% and 16% in the first quarter of 2019

If December 24, 2018 was your pre-scheduled day to rebalance your Retirement Bucket™, how committed would you have been to rebalance into more stock index funds if you subjectively evaluated everything vs. objectively?

If you are like most Americans, you would have said, “you want me to buy more stock funds when we’re in the middle of a bear market? Are you crazy!”

Most Americans would not only take a pass, but they would do what far too many did, i.e. sell their stock funds of our fear.  And, of course, those who did missed the best first quarter in a decade.

How about right after the best first quarter stock market performance in a decade?

Again, if viewed subjectively like most Americans, you would likely take a pass on trimming back some of your stock fund positions which had grown beyond your targeted risk range because the consensus “feeling” is that there is more growth to come!

This is why it is so critical to objectively rebalance on pre-determined dates in both scenarios.

Retirement Bucket™ Rebalancing Example

To keep it very simple, let’s assume that you’ve followed each step in The Relaxing Retirement Formula™ so far, and your carefully calculated  investment mix is to allocate 30% to fixed income and 70% to stock-based investments. (We don’t even need to get into specific investments yet to understand the principle.  Let’s simply stick with a basic 30%/70% allocation without factoring in whether that’s a proper allocation for you or not.)

If this was true for you, and you hadn’t rebalanced in three months or so, it’s highly likely that if you took a snapshot of your allocation on Christmas Eve (see above), your mix likely would have shifted to look more like 34% fixed income and 66% stock-based investments because market prices had just fallen sharply across the board.

If December 24th was your pre-scheduled date to evaluate and rebalance (if necessary), what would be the objective action to take?

The objective answer is to rebalance back to your target allocation of 30%/70%, which requires you to trim back and sell some of your fixed income positions and strategically buy more stock-based asset classes to hit your target exposure.

On the flip side, if your scheduled rebalance date was March 29th, after prices had just risen 13-16%, your objective evaluation would likely have told you to trim back your appreciated stock-based funds (i.e. sell high) and add more to your short-term fixed income positions to bring your targeted mix back into balance.

The bottom line is two-fold:

First, remain objective during good times and bad, as hard as that is during heightened market volatility.  Emotional investors never win.

And, second, successful investing during Phase II of your financial life, when you’re dependent on your Retirement Bucket™ to provide you with monthly cash flow to cover your spending needs, is very different than investing during your “working” years when you had a paycheck to fall back on.

It requires a carefully thought out and disciplined evidence-based “system.”  Random movement for the sake of movement is a recipe for disaster.

Download the PDF

The Ideal Investment Mix During Retirement

As we’ve discussed many times, investing during Phase II of your financial life, when your paycheck from work is no longer coming in, the stakes go way up, and your entire investing mindset and process has to drastically change.

This is where the next set of strategies in your evidence-based investment system are so critical.

After you’ve set aside what not to invest during your retirement, i.e. five years’ worth of your anticipated withdrawals to support your cash flow needs in money markets and short-term fixed income instruments, and away from the volatility of your broadly diversified stock index funds, implement The 4 Ds:

  1. Determine: What percentage of your Retirement Bucket™ of Investments will you dedicate to the higher expected returns a broadly diversified mix of stock index funds have offered vs. bonds and money markets? Historically, the higher the percentage, the higher the probability of capturing higher expected long-term returns and protecting your purchasing power.
  2. Diversify: It can be tempting to invest in a single company (Amazon) or sector (high tech), but your risk increases dramatically. Instead of searching for a needle in a haystack, buy the haystack.  Your chances of outsmarting millions of other buyers and sellers for very long is close to zero.
  3. Delegate: Avoid expensive actively managed mutual funds and hedge funds. Each has a horrible track record of beating their respective asset class index.

Only 17% of actively managed funds have outperformed their index over the last 20 years, and it’s a different 17% each year.

Instead, use low-cost index funds which are a much more disciplined and cost-effective way to own a broadly diversified mix.

  1. De-Escalate: At pre-determined dates during the year, maintain the discipline and strategically rebalance your holdings back to your target exposure so your risk levels remain in check.

The most common question we all hear asked is what’s THE ideal investment mix during my retirement years?

  1. Is it 100 minus your age?
  2. Is it 60%/40%

The best answer to that question is the mix you can hold through all market conditions so you can capture the higher expected long-term returns markets offer. 

It can be that simple.

All the statistics and sales pitches in the world are of no value to you unless you have the confidence, strategy and system in place to hold your carefully selected Retirement Bucket of Investments through all market conditions, including normal and temporary market downturns like the most recent Covid-19 crash or the 2008-2009 financial crisis.

Download the PDF

When Transitioning to Retirement Know What NOT to Invest

Unlike investing during your working years when you had a paycheck to fall back on, investing during Phase II of your financial life, when you no longer have a paycheck coming in from work, begins with knowing what portion of your Retirement Bucket™ NOT to invest.

This may sound rather odd, but this is a key strategy in your evidence-based investment system to capturing the higher expected long-term returns markets have earned.  And, it has both practical and psychological benefits:

  • Psychological: it removes your fear associated with market volatility
  • Practical: You don’t want to be forced to sell investments in a down market when you need money to support your cash flow needs.

As legendary Berkshire Hathaway investor Warren Buffett said, “Investing is the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.  More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

However, as we all know, stock markets don’t always move in the direction we want in the short-term, and prices have temporarily fallen 29% of the time historically.

One of the biggest reasons why the overwhelming majority of investors have such awful results, as illustrated by DALBAR, is their increased queasiness with short-term market volatility, especially when they have to withdraw funds to support their lifestyle.

If prices fall right before you need to withdraw funds, you’ve just suffered investing sin: you’ve sold low!  Or, stated more accurately: you put yourself in a position where you were forced to “sell low” to free up funds for your needed withdrawals.

The Two-Step Retirement Transition Strategy

  1. Hold five years’ worth of your anticipated withdrawals in money markets and short-term fixed income instruments (away from the volatility of your broadly diversified stock funds.)
  2. Direct all dividends you earn on all investments to your money market instead of reinvesting. On average, this will buy you two more years of your scheduled withdrawals.

Knowing you have your cash flow covered for 5-7 years provides you with the confidence to remain fully invested with the rest of your Retirement Bucket of Investments through normal and temporary market downturns.

Having this strategy in place has drastically increased your odds of capturing the higher expected long-term returns markets have provided.

Psychologically, this strategy can be difficult for some folks to implement who have never been in a position of “living” on the money they’ve accumulated.  They feel as though they need to squeeze out every ounce of investment return they can on every dollar they have.  This is especially true when market prices have recently climbed.

That’s admirable and correct when you are not dependent on your Retirement Bucket™ of Investments to support your cash flow, but dangerous and foolish during Phase II of your financial life.

Download the PDF

Evidence-Based Investing in Retirement: 3 Facts and 3 Principles

Investing during Phase 2 of your financial life, when you’re no longer dependent on a paycheck from work, is much more challenging. 

During Phase 1, your focus is simple: earn a solid rate of return

In Phase 2, in addition to that, you have a lot more responsibilities to consider:

  1. Withdrawals: You now have to strategize where you will withdraw the cash flow you need.  
  2. Tax consequences: You have many more tax consequences to consider and plan for: Required Minimum Distributions from your IRA (RMD), capital gains, and dividends.
  3. Increased Stakes: Without that paycheck from work, your Retirement Bucket of Investments has to last because you have nothing else to fall back on.

When you’ve reached this stage in your life when you’re now depending on your Retirement Bucket of investments to support you as opposed to your paycheck from work, earning market returns is no longer a luxury.  It’s a necessity.

If you don’t have an evidence-based investmentsystem” in place after you transition to retirement, which governs your decisions, the odds of earning market returns decrease, and odds of running out of money increase.     

Unfortunately, as the results show, the overwhelming majority of Americans don’t have a system.

Dalbar QAIB

Every year, financial research firm DALBAR performs a Quantitative Analysis of Investor Behavior (QAIB). Here’s what the 2020 DALBAR QAIB Report reveals:

  • 9.96%: The average annual return of the S&P 500 broad stock market Index over the last 30 years from 1990 through 2019 was 9.96% per year (including dividends reinvested)
  • 5.04%: Over the exact same 30 year period, the average annual return of the “average” stock fund investor (i.e. a person) was only 5.04% per year.

Stop and think about all of this for a moment. Over the last 30 years, the actual returns received by investors was only half of what “the market” provided. That’s truly sad.

The obvious question is why has the average investor earned only half of what markets generate?

Given these statistics, we know that markets are not the problem because these figures demonstrate that markets have performed very well.  It must be something else: 

  • Fees: The fees they paid account for part of the problem.
  • Strategy: The biggest contributor is a lack of strategy, and this is the direct result of not having an evidence-based investment system grounded in 3 Facts and 3 Principles.

3 Investing Facts

1. Markets Work:  Since the end of World War II, 1945-2019, the S&P 500 Stock Market Index has earned:

  • 11.2% per year (with dividends reinvested),
  • 7.3% per year greater than inflation

Bottom Line: Stocks have generated inflation fighting long-term returns.

2. Markets are Volatile: Over the same timeframe from 1945-2019, there have been 93 market pullbacks of 5% or more:

  • 59 of the 93 were between -5% and -10% with an average drop of 7%. 
  • 22 of the 93 pullbacks were between -10% and -20%, with an average of price drop of 14%.
  • 9 of 93 were between -20% and -40%, with an average of price drop of 26%. 
  • 3 of the pullbacks were over -40% (including the dot.com crash in 2000-2002 and the Great Recession Financial Crisis between 2008-2009),

Bottom Line: the market’s long-term climb has included many falls.

3. Markets Recover:

  • Of the 59 pullbacks between -5% and -10%, it took an average of only two months to recover back to the original price before the drop.
  • Of the 22 between -10% and -20%, it took an average of only 4 months to recover back to the original price before the drop.
  • Of the 9 between -20% and -40%, it took an average of 14 months to recover back to the original price before the drop.
  • In 90 of the 93 market pullbacks since World War II, 87% have recovered in 4 months or less and 97% have recovered in 14 months or less. 

Bottom Line: All stock market drops have been temporary, and most have been brief.


1. Time Matters

  • Investing is a long-term solution to a long-term problem which is keeping your purchasing power well above inflation.
  • In the short term, stock market prices fluctuate a ton. They always have and they always will.

Bottom Line: Have a workable strategy to deal with short-term volatility so you can capture the higher expected returns markets have earned.

2. Costs Matter

  • Just 1% in additional fees costs a $1million Retirement Bucket of Investments earning 8% per year a staggering $2.2 Million in extra fees over 30 years (your joint life expectancy).

Bottom Line:  Pay careful attention to fees, especially in annuities, actively managed mutual funds, and hedge funds.

3. Allocation Matters

  • To justify high fees, many Wall Street firms sell superior research and market-beating returns. 
  • The evidence, however, paints a very different picture.  According to extensive research by Nobel prize winning economist Eugene Fama and Dartmouth Professor Ken French, 95% of historical stock returns dating all the way back to 1928 can be attributed to only 3 factors:
    • Exposure to stocks in general vs. treasuries and other fixed income instruments
    • Exp to smaller vs. larger companies
    • Exposure to value vs. growth stocks
    • Only 5% of historical returns can be attributed to something outside of these three factors like superior selection and/or market timing. 

Bottom Line: Allocation matters much more than superior stock selection.

In order to earn the market returns you need in order to make your Retirement Bucket™ last while it supports your desired lifestyle, employ an evidence-based investment system grounded in these three facts and three principles.

Download the PDF

What You Must Know BEFORE Investing During Retirement

Every “retirement calculator” I’ve come across from any financial firm always begins with you assuming an investment rate of return you either want to earn or think you can earn

This completely puts the cart before the horse.  It’s what gets so many people into trouble at this critical stage in their lives, and what causes so much confusion and anxiety.

Once you’re past the first steps in The Relaxing Retirement Formula™ and you know just how dependent you are on your Retirement Bucket™ and how long it must last, the next question is, what investment rate of return do I need to earn to make my Retirement Bucket of investments last?”

I’m now in my 32nd year of coaching individuals and couples through this challenging transition, and I have yet to meet one couple who knew the investment rate of return they must earn in order to make their Retirement Bucket of Investments last before we met.  Not one! 

This is not chosen arbitrarily.  It’s the investment rate of return that allows your Retirement Bucket™ to keep pace with inflation and remain intact year after year while you to continue to spend what you want.

And, it’s different for everybody so there are no accurate “rules of thumb.”

Why This Rate Is Different for Everybody

To illustrate, let’s revisit our two couples, Mike and Mary, and Ron and Rose, both age 62. To keep it simple using round numbers, assume each couple has:

  • $2,000,000 built up in their Retirement Bucket™,
  • the same social security retirement income of $3,000, and
  • the same monthly pensions of $3,000

Beyond that, here’s what else we know about them:

Mike and Mary have no mortgage or home equity line of credit, and they have recently completed many major upgrades to their home, i.e. a new roof, indoor and outdoor paint, a new furnace, new kitchen countertops and cabinets, and new bathrooms. They purchased new cars with cash in the last two years which they plan to drive for ten years.

Ron and Rose still have $300,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions, weddings, cars, and a condo down in Florida they bought a few years back. They both drive high end cars which they replace every three years. And, while their home is very nice, after 26 years, it is starting to look “tired” and will need significant upgrades in the next two years.

Ron and Rose are clearly more dependent on their Retirement Bucket™ than Mike and Mary, meaning they need to withdraw a lot more money each month to support their more expensive lifestyle, i.e. $9,500 per month vs. $6,500 per month.

In order for Ron and Rose’s Retirement Bucket to remain intact for the rest of their lives, it needs to grow faster just to remain full so they don’t run out of money.

  • 4.0% per year: Mike and Mary’s minimum investment rate of return needed
  • 7.2% per year: Ron and Rose’s minimum investment rate of return needed

There is a significant difference between having to earn 4.0% per year vs. 7.2% per year!  And, this is why generic “rules of thumb” like 100 minus your age are so dangerous at this stage in your life.  It’s impossible for that to be the correct formula for Mike and Mary and Ron and Rose. 

Given this, Ron and Rose’s Retirement Bucket Strategy has to be very different than Mike and Mary’s!

When you’ve reached the stage where the money you’ve saved must now support you for the rest of your life, when you’re dependent on your Retirement Bucket™ to “live” as opposed to receiving a paycheck from the work you do, you have to think very differently about how you invest. 

Investing without knowing the real rate of return you must earn first is like having invasive surgery without being thoroughly diagnosed first.  It doesn’t make any sense.

Download the PDF

More Investor Biases You Must Avoid in Retirement

In the last edition of RETIREMENT GAMEPLAN, I shared DALBAR’s Annual Quantitative Analysis of Investor Behavior (QAIB) results. 

As a refresher, according to DALBAR’s 2020 QAIB, the average stock fund investor earned only half of what the broad stock market index earned each year over the last 30 years. 

From January 1990 through December 2019:

  • 9.96% per year: Average annual return of the S&P 500 stock market index (with dividends reinvested)
  • 5.04% per year: Average annual return of average stock fund investor (i.e. not a fund, but a person)

The question we always have to ask after reading these disturbing results is why?  

Why do the investment results of the average stock fund investor so drastically trail the most basic index of broad stock market returns year after year?

The only two logical possibilities are:

  • “how” they invested, i.e. when they bought, when they sold, what they chased, what they were scared out of, etc., i.e. their investing behavior, and
  • the fees they paid, which ate into their returns. 

Let’s closely examine these root causes so we can help you avoid these horrific results and close this gap!

More Destructive Investor Biases You Must Avoid

In the last edition, we dove into some of the root causes by examining some of the debilitating biases most investors bring to the table.  Before examining the second reason investor returns are so low compared to market index returns (i.e. the fees they pay), let’s examine a few more investor biases so you can close this gap!

  • Overconfidence Bias: Overconfidence Bias comes from an underlying belief that you or anybody can consistently predict the future, and benefit from it.

    The only rational and educated answer to this question is no.  If only 17% of active mutual fund managers have beaten their respective index in a given year with the wealth of information and talent around them, what is the probability that any of us can have a long-term advantage over them? 

    And, the 17% is not the same list each year, i.e. the managers who beat their respective index in 2020 is a completely different list than those who did so in 2019!
  • Greed Bias:  Another debilitating bias is Greed.  This comes from the desire to hit “home runs.”  In essence, this is gambling. 

    Gambling occurs when you don’t use high levels of probability to obtain the outcome you want and need.  I see this with some of the folks I’m introduced to whose investments are not linked to stated long-term goals, like those entrenched in cryptocurrency trading at the moment, i.e. Bitcoin, etc.

    Or, their investments are not linked to reality, i.e. seeking something that doesn’t exist like market returns without market volatility.

    In essence, they’re looking for something that any rational person knows does not exist.
  • Staying Home Bias: While the share of the value of the world’s companies headquartered in the United States is only 52%, Americans invest 76% of their wealth in American companies.

    This may sound patriotic, but it doesn’t make much sense from an investment perspective.  48% of the world’s capitalization lies outside the U.S. in thousands of profitable companies. 

    Staying Home Bias occurs when you place a higher value on a company headquartered in the U.S. simply because it’s home office is located here. 

    A great example of this is Toyota. Although their headquarters are in Japan, far greater than 50% of Toyota cars are purchased by Americans. 
  • Negativity and Loss Aversion Bias: I saved the strongest one for last.  Loss Aversion Bias stems from the ingrained “fight or flight” defense mechanism in our brains.

    While that served cavemen well, and saved lives, it is incredibly destructive for long term investor success.

    The key to overcome this is education and consistent reinforcement in good and bad market climates, i.e. a rational understanding and realization that market corrections and crashes are normal and temporary, and simply part of your investment experience.
  • Since 1980, the S&P 500 Index has experienced a peak-to-trough intra-year market correction of 14% per year, i.e. at some point during the year, prices fell 14% on average.
  • Since 1945 (74 years), there have been 92 stock market pullbacks of 5% or more. 
  • 89 of the 92 pullbacks recovered in 14 months or less, and 80 of those 92 recovered in 4 months or less.

In spite of all of these, market prices and dividends have risen dramatically outpacing inflation by 7.3% per year.

While this is challenging to remember during turbulent times, nobody earns market returns without experiencing market turbulence, corrections, and crashes. 

As legendary investor Peter Lynch said, “more money is lost anticipating market crashes than the crashes themselves.”

Confidently living the life you’ve earned after your retirement transition requires successful strategies and mindsets.

Download the PDF


Annuities: When to Consider and When to Run for the Hills

As promised in the last edition after the questions I received, I’m now going to give you some examples of situations where I believe you should run away from annuities when they are being proposed to you, and some situations where an annuity might be something for you to consider.

Before addressing situations where I believe annuities are grossly oversold, here are the three situations where annuities might be appropriate for you as long as you do your proper research before signing on the dotted line.

1. Tax Deferral

If you have funds held outside of your IRA, Roth IRA, and/or employer sponsored retirement plans that currently earn interest, dividends, and/or capital gains that you’re not currently spending, an annuity can be used to defer income taxes until you need the money to spend. 

There are three potential benefits of doing this:

  1. Deferring the Tax: You control “when” you pay the tax.  By doing so, you can benefit from compound interest and gains on the balances that would have gone to taxes if held outside of the annuity.
  2. Taxes on Social Security Income: The amount of tax you pay on your social security income is in direct relation to the amount of income you receive in addition to social security.  The lower the amount of your other “provisional” income, the less of your social security income that is subject to tax.

If you currently have interest, dividends, and/or capital gains coming from investments which you’re not spending, using an annuity to defer the taxes on those items not only reduces your taxes on that interest, but it may also reduce the amount of tax you must pay on your social security income.

  • Medicare Part B Premiums: As many of our Relaxing Retirement members have learned, your Medicare Part B premiums you pay are based on the amount of income on your 1040 tax return the prior year. 

Like the example above, if you reduce your taxable income, you may qualify to pay a lower Medicare Part B premium.  One tool to reduce your taxable interest, dividend, and capital gain income is a tax deferred annuity.

There is a downside to this tax deferral strategy, however, which you must know going in.  

All money withdrawn from a tax deferred annuity over your initial investment are considered “ordinary income” and thus taxed at ordinary income tax rates

For example, if you deposit $100,000 into a tax deferred variable annuity and it grows to $150,000, you will pay ordinary income tax rates on the $50,000 of growth when you withdraw the funds.

If you invested in a traditional mutual or exchange traded fund held outside of an annuity or IRA and the value increased from $100,000 to $150,000, you would pay “capital gains tax rates” upon the sale.

This is significant because federal ordinary income tax rates can be as high as 37.0% currently, whereas capital gains tax rates top out at 20%.  

If the investments you will own inside the tax deferred annuity will qualify for capital gains tax treatment, you have to strongly weigh the long-term tax deferral benefits vs. the higher tax rate you and your family will pay upon withdrawal.

2. Tax Free Exchange From Life Insurance

If you currently own whole life insurance (that you’ve determined no longer need) with significant cash value, you may have a tax problem when/if you cash in your policy. 

To the extent that your cash value is greater than the premiums you’ve paid over the years, you will owe ordinary income taxes.

In other words, if you have a policy with a cash value of $100,000 and over the years, you’ve paid a total of $60,000 in premiums, when you surrender your policy, you will owe ordinary income taxes on the difference, i.e. $40,000.

A way of deferring this tax burden is to directly exchange your life insurance policy’s cash value into a tax deferred annuity.

By doing this, there is no tax burden at the time of the exchange and you get to continue tax deferred growth on your funds until you choose to withdraw funds.

3. Annuitizing

Annuitizing simply means turning your savings into monthly income for a stated period of time, typically for life.

  • Covering a Specific Expense:  While this would never be the situation a Relaxing Retirement member would find themselves in, if social security is your only source of guaranteed monthly income, and you have a specific bill that must be paid each and every month, consider funding an immediate annuity.  Structure the amount of the payment to you to cover that expense for the period of time the expense exists, i.e. a mortgage.
  • Medicaid Planning:  It would be impossible to cover all the issues concerning qualifying for Medicaid in this edition.  However, as we reviewed recently, in the big picture, if you have assets above a very minimal level, you will not qualify for Medicaid assistance to pay for your care. 

    One strategy used by many elder law practitioners is to move current assets into an immediate Medicaid approved annuity. 

    In the eyes of the federal government, once the funds are deposited to the immediate annuity, the asset no longer exists.  Only the income from that asset which significantly increases your chances of qualifying for Medicaid assistance.

    However, the same warning that I’ve raised still applies here.  Remember that when you annuitize, you give up access to your money other than receiving your monthly income.  When you and/or your beneficiary pass away, the insurance company keeps the money.
  • Guaranteed Income:  If you want some portion of your monthly income guaranteed, an immediate annuity can accomplish this. 

    Two caveats come with this, however.  The first I just alluded to which is to remember that once you annuitize, your asset is turned over to the insurance company.

    The second is inflation.  With most annuities, the payment is guaranteed for a certain period of time, typically for life.  However, there is no cost of living increase each year to keep pace with inflation.  So, if your monthly payment is $2,000 per month, 10 and 20 years down the road, you’re still going to receive $2,000 per month even if inflation has decreased the value of that $2,000.

Now let’s take a look at situations where I believe annuities are being oversold.

1. Buying a Variable Annuity “Inside” of Your IRA or Roth IRA

As was the case with the story of the brother of an existing Relaxing Retirement member I shared with you recently, a classic example of a situation I see way too often that I don’t recommend is investing in a variable annuity inside your IRA or Roth IRA.

As I outlined above, one of the benefits of an annuity is tax deferred growth of your money.  However, all investments held inside of an IRA or Roth IRA grow tax deferred already.

Given this, why would you need to place a tax deferred vehicle (annuity) inside of a tax deferred vehicle (your IRA)?  An example of this is rolling over balances from your retirement plan at work, i.e. your 401(k), 403(b), or your pension plan into an IRA and investing in an annuity inside your IRA.

Although sellers of annuities tout all the bells and whistles of complicated annuities, there really is no valid reason to invest in one inside of an IRA.

Unfortunately, one of the main reasons why it’s recommended so often is the commission paid on an annuity vs. an alternative.  With the exception of a few no-load annuities (offered through fiduciary advisors who accept no sales commissions), fixed, variable, and equity indexed annuities typically pay much higher commissions, so there’s a significant incentive for a broker to sell an annuity instead of just a mutual fund or an exchange traded fund.

All things being equal, this alone would not be a profound problem.  However, in order to pay those higher commissions, the insurance company sponsoring the variable annuity must charge you higher fees!

For this reason, I do not recommend this practice.

2. Equity Indexed Annuities

During volatile financial markets, products are created and heavily marketed which appear to be “one-size-fits-all” solutions. 

In my opinion, equity indexed annuities fall into this category.  Their promise is to allow you to invest in stocks (using one or more indexes, like the S&P 500), yet not lose any money personally if the market index goes down.

When you first hear the concept, it sounds extremely attractive.  In short, they propose that you will receive the upside benefits of investing in stocks without the downside risk! 

However, as with most financial instruments, you have to read the fine print.  If it sounds too good to be true, it probably is.

Insurance companies do place a floor on your deposit so that when you withdraw funds from the equity indexed annuity, you will receive no less than you deposited.

However, a few key points to note:

  • If you withdraw funds over the first 10 to 25 years, you have to pay a stiff surrender charge for access to your money.  And, I’ve seen that charge be as high as 15%. 
  • Your upside potential is limited.  If the S&P 500, or whatever index your annuity is tied to, earns 10%, you don’t get credited with a 10% gain on your equity indexed annuity. Your gains are capped at a much lower percentage and the insurance company keeps the rest.
  • There is a high price to pay for this “guarantee.”  If you break open these complicated products, you will discover that you are paying significant fees to the insurance company to provide their guarantee, and to pay commissions to the broker who sells the equity indexed annuity.

Without knowing any more, if you objectively stand back and examine this product, you have to ask yourself how the insurance company can take on this exposure and not have a problem down the road. 

During the Covid-19 pandemic, for example, when the S&P 500 Index dropped over 34%, how did their company stand up when they had to guarantee no losses to their equity indexed annuity customers? 

How are they going to keep that promise indefinitely if the stock market doesn’t cooperate and there is a run on annuity deposits from their customers?

For this reason alone, I’m not a fan of equity indexed annuities.

To sum up, I do believe there are very limited situations which warrant using an annuity as long as you do so with your eyes wide open.  I simply believe that those situations are much, much more narrow than those currently being sold today.   

Homework Assignment

Once you’ve digested these last few editions of RETIREMENT GAME PLAN dissecting annuities, and your interest is peaked, here are just a few more recommendations for you before considering using an annuity:

  • Access to Your Money: Be very clear on the language of the insurance company’s surrender charges when you need access to your money.  This is critical.  There are companies who have no surrender charges when accessing your money.
  • Insurance Company Ratings:  With fixed annuities specifically, be careful to examine the independent ratings of any insurance company you’re considering.  Remember, how well you do is directly tied to the performance of that insurance company. 
  • Fees:  Specific to variable annuities, be very clear what their insurance charges are to run the annuity, typically 1.50% or so as a base, and much more in many cases for the “bells and whistles” agents and brokers love to add on.  If a variable annuity is what you’re after, a few companies now have very low cost variable annuities.  Additionally, examine the internal management fees of the mutual fund subaccount options.  Insurance companies tend to offer very expensive, actively managed funds as opposed to low-cost index funds.  These excess fees can have a significant negative impact on your returns. 

I hope this has been helpful for you.  I strongly recommend keeping these editions of RETIREMENT GAME PLAN close by for reference whenever you see an “attractive” ad for annuities, or you receive a “pitch” from a broker. 

Download the PDF

3 Destructive Investor Biases the DALBAR Report Reveals About Investing During Retirement

DALBAR Inc. is the financial community’s leading independent expert for evaluating, auditing and rating business practices, customer performance, product quality and service. 

Since 1994, DALBAR’s Annual Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell, and switch into and out of mutual funds over short and long-term timeframes.  These effects are measured from the perspective of the investor and do not represent performance of the investments themselves. 

According to DALBAR’s 2020 QAIB, the average stock fund investor earned only half of what the broad stock market index earned each year over the last 30 years. 

From January 1990 through December 2019:

  • 9.96% per year: Average annual return of the S&P 500 stock market index (with dividends reinvested)
  • 5.04% per year: Average annual return of average stock fund investor (i.e. not a fund, but a person)

Take a moment to read those again to let them sink in.

Why Are Investment Results So Awful?

The question we always have to ask after reading these disturbing results is why?  

Why do the investment results of the average stock fund investor so drastically trail the most basic index of broad stock market returns year after year?

The only two logical possibilities are:

  • “how” they invested, i.e. when they bought, when they sold, what they chased, what they were scared out of, etc., i.e. their investing behavior, and
  • the fees they paid, which ate into their returns. 

Let’s closely examine these root causes so we can help you avoid these horrific results and close this gap!

Destructive Investor Biases

When we closely examine investors, as I have for decades, there are several biases that they bring to the investing table each day which drive their investing behavior.  And, this is what leads to the horrific results reported by DALBAR. 

Let’s examine three of the most common investor biases to avoid:

  • Recency Bias: The first of those is Recency Bias, i.e. mistaking recent events for ongoing “trends,” and thus repositioning your investments accordingly in order to take advantage of your “hunch.”

    This is a challenging one to navigate because we all want to believe that there is a direct correlation between what just happened and what will now happen next. 

    Think of March 2020 during the COVID pandemic outbreak when stock market prices fell over 35% in just 30 days.  Believing that was a “trend,” millions of Americans sold out of over $300 billion of stock mutual funds.

    Once again, however, markets rebounded swiftly recovering in just a few short months while all of those investors who sold out missed the recovery.

    Unfortunately, as Warren Buffet stated: “investors project out into the future what they have most recently been seeing.”
  • Endowment Effect Bias: Another bias is what is known as the Endowment Effect Bias which occurs when investors place greater value on something they already own, i.e. they are very subjective

    They begin the process by justifying what they have done up until now, and focus on what they already own as the starting point.  This information is of value when trying to understand the mindset behind prior decisions.  But, it is of no value when objectively evaluating and designing an effective investment mix to achieve long term future goals.

    A great question to ask if you find yourself engaging in this behavior is, “if you didn’t already own what you currently own, and all of your money was in cash, would you go out and buy the exact investments in the exact same quantities as you currently hold them?”

    When asked that way, most instinctively respond “no”.

    If that is true, then the follow-up question is, “why do you continue to own what you own?”

    I know these are tough questions because they challenge our current way of thinking.  However, they’re incredibly important to your long-term investment results, and thus your level of financial independence. 
  • Confirmation Bias: Another destructive investor bias, closely related to this, is known as Confirmation Bias which occurs when you seek information that confirms your own preconceptions and beliefs. 

    What this leads to is avoiding, undervaluing, and even disregarding anything that conflicts with your preconceived beliefs.  Ultimately, it closes your mind to what could very well be the truth, and thus a valuable solution for you. 

    We’re all guilty of this to some degree in all facets of life.  We all like to watch the news stations that slant in the direction which we identify with. 

    The danger when investing is that this bias shuts off your ability to objectively evaluate your past decisions, and thus your results.  I see this all the time when folks spend wasted energy and time trying to justify and defend their past choices and decisions.  

Investing during your retirement years, when you have to rely on the Retirement Bucket™ of investments you’ve so carefully built up to support you, requires a disciplined “system” like our Relaxing Retirement Formula, so you can resist the temptation to follow the crowd and engage in these lines of thinking. 

Download the PDF

Investment Strategy Problem #3 in Retirement – Don’t Let the Tax Tail Wag the Dog!

In the last few editions of RETIREMENT GAME PLAN, I’ve revealed an incredible statistic reported by DALBAR, Inc., a Boston based research firm which revealed that while the S&P 500 Stock Market index earned 9.96% per year over the last 30 years, the average stock mutual fund investor earned only 5.04% per year over those same 30 years, nearly 50% less!

Since then, I’ve revealed (2) big reasons why this is the case.

One of our Relaxing Retirement Members asked me why I keep outlining all of these mistakes.  It’s a very perceptive question!

The reason is simple.  If you listen to the mainstream financial media “marketing machine,” who has goals which are in direct conflict with your goals, you might be led to believe that markets (up, down, and sideways, etc.) dictate our real life investment returns.  (That’s why they spend so much time every day talking about market returns.)

If that was true, then we’d each earn whatever the market produced.  Well, we all know that’s not the case.  As the DALBAR, Inc. report pinpoints, the average stock mutual fund investor earned 50% less each year than the broad market index over the last 30 years.  50% less! 

The reason I continue to point out the “behavioral” mistakes individuals made that led to this catastrophic result is so you can potentially avoid them, and increase your chances of earning the higher expected returns you need to earn in order to experience total financial independence and live the life you’ve earned.

The key point is that each of these mistakes is within our control to avoid.

Let’s take a look at another costly mistake we see way too often which leads to these awful results!

Letting the Tax Tail Wag the Dog

Let me explain what I mean by walking you thru a real-life Case Study of an employee of GE:

  • Charlie was an employee of GE for 42 years
  • He purchased GE stock shares through payroll deduction during entire career
  • As a result of purchases and stock splits, when Charlie retired in January 2002, he owned 5,100 shares!
  • At $315 per share, the value of his shares was a little more than $1,600,000
  • What’s important to note is that these GE shares represented 63% of Charlie’s investment holdings! 
  • The next important fact was that his cost basis in the GE shares (i.e. what he paid for them) only $80,000

Question #1 to Contemplate: Is it a good idea for Charlie to have 63% of his investments tied up in any one stock?

Question #2: If Charlie had $1.6 million in cash today, should he buy $1.6 million of GE stock?

Question #3: If the answer is no, why would Charlie then hold on to them and not diversify?

The Answer: Taxes!

Because his cost basis was only $80,000, if he sold the shares back in 2002, he would have paid approximately $304,000 in federal capital gains taxes and walked away with $1,296,000.

As is common for a very good reason, Charlie’s focus was on the $304,000 he had to pay to free up the money and diversify.

He would have been far better off focusing on the fact that he had to part with 19% in order to free up the other 81%.  It sounds a lot better. 

So, what did Charlie do?

Like the overwhelming majority of people, Charlie hung on to the GE shares to avoid paying any taxes.    

Now, let’s take a look ahead to today and see how good of an idea that was.

  • If Charlie sold the shares back in 2002, paid the tax, and reinvested the remaining $1,296,000 in a generic and simple S&P 500 Index Fund, and allowed dividends to reinvest from January 2002 through December, 2020, the value would have grown to approximately $5,951,695 by the end of 2020.

Let’s now look at where Charlie was at the end of 2020 since he didn’t sell his GE shares back in 2002 in order to avoid paying taxes.

  • If he continued to hold GE shares, including reinvesting the dividends, on December 31, 2020, his shares were worth $769,120.

To recap, had he sold his GE shares, paid the taxes, and reinvested, he would have had $5,951,695 at the end of 2020.

However, because he let taxes drive his investment decision back in 2002, he had $769,120 (the value of his GE shares at the end of 2020 including reinvestment).

The “Cost” of Letting the Tax Tail Wag the Dog

If you do the math, that’s $5,182,575 that Charlie lost because he “Let the Tax Tail Wag the Dog” instead of using sound, rational judgment.

Charlie focused on the dollar amount that he had to pay in taxes which was over $300,000.  I completely agree that’s no fun (and the fairness of it is another topic we won’t touch today). 

However, by focusing on that dollar cost, he drastically increased his risk and lost over $5 million!

This is a classic example that I’ve personally witnessed time and time again.  And, it’s one of the great lessons of why the average investor not only doesn’t beat market averages, but instead, as statistics have now shown, has earned a very costly 50% less.

Stay out of the trap!  Before making any investment decisions, you must evaluate the tax consequences and the investment consequences simultaneously!

Download the PDF

Investment Strategy Problem #1 in Retirement – Wrong Goal

In the last edition of RETIREMENT GAMEPLAN, I shared the story of Ron and Rita and the good and bad news I had to share with them.

After analyzing and crafting their custom-designed Retirement Blueprint™, taking into account all of their priorities and all their resources, the good news we shared was they had enough money to make it all work!

Enough money and income from social security and a small pension to continue living exactly the way they wanted without running out of money over their expected lifetime.

What an accomplishment!

But, before the party balloons were released, I had to share some sour news with them as well.

And, that sour news as that if they continued to invest the same way they had, their Retirement Bucket of investments would run out in 8 to 9 years.

Now, that may seem like a contradiction, but it’s not. 

They do have enough built up to make it work, but their Retirement Resource Forecasters that we use to design their Retirement Blueprint™ have some assumptions built into them, as all forecasts do.

One of those assumptions was that the rate of return earned on their Retirement Bucket™ of investments had to average 1.5% above the rate of inflation over the duration of their life expectancy. 

Historically, this has been accomplished without significant effort.  Long-term inflation and market performance statistics spell that out clearly.

However, given Ron and Rita’s actions (as illustrated by their investment spreadsheets that they shared with me), it’s extremely unlikely that they’ll be able to accomplish this.

The reason I had to reveal this piece of bad news with Ron and Rita was the 2020 DALBAR Quantitative Analysis of Investor Behavior research that I shared with you in the last edition. 

To refresh your memory, here’s what their study on the results for the 30-year period from January, 1990 through December, 2019 revealed:

  • The Average annual return of the S&P 500 Stock Market Index from was 9.96% (including dividends reinvested)
  • Over the same 30 year period, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) was 5.04%

What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 30 years of 9.96%, the average stock mutual fund investor (a person, not an investment) only achieved 5.04%!

That means that the average stock mutual fund investor’s return was only half of what the broad stock market index provided each and every year!

How incredible is that!

What Can We Learn From This?

What you can’t help but take away from those statistics is that, while it makes all the news, markets (or bad investments) are not our biggest problem. 

The BIG problem is what the average investor does with markets, i.e. investor behavior, which is driven by their “strategy” or lack thereof.

Forget for a moment about trying to “beat the market” which is what everybody loves to talk about and talk shows are built on.

The average stock mutual fund investor earned 49.4% less each and every year than the broad market S&P 500 index. 

Think about that for a moment.  Something that we all can control is what our biggest problem is.

I recognize that I’m repeating myself, but I’m doing so to emphasize this critical point.

It’s uncomfortable, but it’s the only logical and rational conclusion we can reach given the results of this research report.  What else could possibly explain the massive difference in real life returns that people receive?

What Can You Do To Close This Performance Gap?

The first piece of news to share is that there is no one reason or one strategy you can use to close this gap. 

However, over the last 32 years, there are several “strategic behavioral mistakes” that I’ve personally witnessed that I’d like to share with you.

And, these are the biggest reasons why I believe the average investor earned 49.4% less than the broad stock market provided over the last 30 years. 

Let’s start today with Reason #1 why I believe this massive performance gap exists:


Let me clarify what I mean by “Investment Governing Issue” because it has many important points that I suggest you make a note of.

First, a statistic for you that you may have heard me share with you before: the average retirement age today in America is age 62. 

If you are a 62 year old couple (and each of you does not smoke), insurance company mortality tables tell us that at least one of you will live to be 92 years of age!

Please take a moment to go back and read that last paragraph before going on.

That means that, if you’re age 62, you’ve got 30 years with which to provide lifestyle sustaining income. 

30 years! 

Not five. 

Not ten. 

Not even just twenty. 

But 30 years!

The Goal: Lifestyle Sustaining Income

By “lifestyle sustaining” income, I mean income that keeps your standard of living the same even when prices rise.

Let me put that into perspective for you. 

  • In 1932, a first class stamp cost 3 cents.
  • In 1971, it was 8 cents.
  • In 1991, it was 29 cents.
  • In 2021, it’s 58 cents! 

This is not to send a “better” letter in the mail, but the same letter.

While there are very few guarantees in life, one that I believe we can prudently count on is the fact that life will continue to get more and more and more expensive.

As I just illustrated, the price to mail the exact same letter costs you twice what it did just 30 years ago.

That’s extremely instructive given the 30-year average lifespan of a 62 year old retiring couple.

Protecting Principal vs. Protecting Purchasing Power

Now, here’s the problem from an investment standpoint…what is the dominant governing issue among the overwhelming majority of investors as they approach their retirement transition?

Protecting Principal! 

Whenever you hear the overwhelming majority of dedicated savers approaching their retirement transition talk about “risk”, this is what they’re focused on.  Above all else, “we have to protect our principal.”

And, this governs their investment decisions.

In reality, the biggest financial issue, as I’ve just illustrated, is the protection of your “purchasing power,” or your ability to sustain the same lifestyle you desire.

This has nothing to do with wanting “more” for yourself. 

It’s about sustaining the same lifestyle. 

Even if inflation is only 3% over the next 30 years, and I would strenuously caution you against using that low of a number, but even if it is only 3%, you’ll need $244 to pay for the same goods and services that $100 in your pocket pays for right now.

That means that if groceries currently cost you $100 per week, they’ll cost $244 for the exact same groceries.

Again, this is not a bonus to protect your purchasing power.  It’s a bare necessity

Yet, the overwhelming majority of dedicated savers approaching their retirement transition have as their #1 goal to “protect their principal,” when in fact it has to be the protection of their lifestyle sustaining income.

I can’t stress enough how important it is to clearly distinguish between those two goals if you want your hard earned money to be there for you for the rest of your life.

Stay tuned for the next edition as I’ll reveal the 2nd biggest reason for the horrific performance gap of the average investor, and what you can do about it.

Download the PDF

Investment Strategy Problem #2 for Retirees: Investing vs. Speculating

Are you investing or are you speculating?  There’s a very big difference and it could be costing you dearly!

In the last editions of RETIREMENT GAMEPLAN, I shared the story of Ron and Rita and the damage they did to their investment results because they didn’t understand this crucial distinction.   

One of the main culprits which led to the horrific investment results achieved by the average investor over the last 30 years was speculating instead of investing.  In this edition, I’m going to share the costly difference between the two and how you can determine which side of the fence you’re on. 

As a refresher, here’s what The 2020 DALBAR Quantitative Analysis of Investor Behavior study on the results for the 30-year period from January, 1990 through December, 2019 revealed:

  • The Average annual return of the S&P 500 Stock Market Index from was 9.96% (including dividends reinvested)
  • Over the same 30 year period, the average annual return of the “average” equity mutual fund investor (not investment, but an investor, i.e. a person) was 5.04%

What these numbers tell us is that, while the S&P 500 Market Index delivered a strong average annual return over those 30 years of 9.96%, the average stock mutual fund investor (a person, not an investment) only achieved 5.04%!

What you can’t help but take away from those statistics is that, while it makes all the news, markets or bad investments are not our biggest problem. 

The big problem is what investors “do” or their investor behavior which is driven by their “strategy” or lack thereof.

Are You Investing or Speculating?

The 2nd big reason why I believe the average investor earned 50% less than the market averages each and every year over the last 30 years is crossing the line from investing into “speculating.” 

What does that mean?

A speculator chases price trends

An investor chases value, and what investors know that speculators never know is that price and value are “inversely related.”

So, for example, think back to the early 2000s when high tech internet stock prices were going through the roof.

As their prices rose, the interest in them rose dramatically at the same time.  Investors continued to pour more and more money into high tech internet stocks.  And, nobody was buying what was then referred to as “old economy stocks” like Berkshire Hathaway.

What Speculators Get Wrong

Speculators always respond to price.  And, this means on the way up and on the way down.  They believe that the risk of a particular investment goes down as the price goes up.  So, as the price goes up, the risk appears “lower” to them.

Conversely, as the price of an investment drops, they believe the risk goes up thus leading them to sell it!

Let me repeat that because you definitely want to make a note of it. 

Speculators always respond to price.  And, this means on the way up and on the way down.  They believe that the risk of a particular investment goes down as the price goes up.  So, as the price goes up, the risk appears “lower” to them.

And, conversely, as the price of an investment drops, they believe the risk goes up thus leading them to sell it!

An investor, on the other hand, migrates toward an investment whose price has fallen because an investor knows that as price goes down, the value (and the expected return) of the investment goes up.

Understanding this subtle, but critical difference can make all the difference in your investment results, and your ability to achieve total financial independence and live the rich, full life you’ve earned!

Download the PDF