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.

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