When we listen to Wall Street and other financial institutions, they all repeat the same old stories decade after decade. Common mantras like: “buy and hold, the market always comes back” or “you haven’t lost until you sell,” and “invest as much money as you can in the stock market as soon as you can.” These are just a few examples of what you hear from the financial industry, experts who are consistently promoting the services they sell to you. Is this really the right way to invest? Let’s dive deeper into these mantras and make sure the decisions you make are best for you, not the financial industry.
We'll begin with a simple question: Would you invest in a vehicle where your savings are subject to losses and with just a 2% annualized rate of return?
Think about that for a minute. You have the risk of potentially losing money compounded with the fact that this vehicle, over the last decade and a half, has produced an annualized return of just 2.0%. Would you put your hard earned savings into a plan that works like this? Most people I’ve talked to have replied with a resounding NO.
Take a look at this hypothetical chart showing a $1 million investment in the S&P 500 Index. If for example, in 2000, if you had a starting balance of $1 million in your portfolio, you would have taken a substantial hit due to the multi-year market decline. From 2000 to 2002, your investment would have dropped from $1 million to around $600,000, approximately a 40% loss. If you had the courage to stay in the market, you would have spent the next five years crawling back to nearly breakeven in 2007. This is the equivalent of spending seven years in the markets and not earning a dime.
Then the financial crisis of 2008 hit and your portfolio drops 38%, down to roughly $615,000. Again, it takes about five years to get back to our original $1 million. Another five years wasted playing catch up. Take a good look at the chart, how much have you earned from 2000 to 2008 with a “buy and hold strategy”? Nothing…
If you’ve been in the market since 2000 you have only realized profits in the last couple of years. In this example, our $1.0 million beginning balance grew to $1.4 million at the end of 2014. That’s an average annual rate of return on an IRR basis of 2.0%. Is an investment return at par with long term CD rates worth the risk? Did the buy-and-hold strategy really work over this period of time? These approaches are being promoted by Wall Street, mutual fund companies and other financial institutions every day. What they may not be telling you is that every time you lose money in the markets, you create a drag on your account where your portfolio is constantly working to get back to even. As you can see, this drag can stay with you for 5, 10 plus years. Is this the best that Wall Street and other financial institutions have to offer? And more importantly, is it working for you even now? Is this really the right approach for investing or is there a better way?
The problem with “buy and hold” is that investors never hear the full title of that strategy, which may be why people don’t understand the major flaw until it’s too late when the money is gone and the years are wasted. The full title of the strategy is “Buy at Any Price in the Market and Hold with No Plan for Risk or Profit.” Does this make any sense to you? Do you think this is the strategy financial institutions use for their capital? What investors need to realize is, it is not a problem with Wall Street, it is simply a lack of understanding on the part of the investor on how the financial markets work. To really change your financial trajectory, there is only one answer: Stop thinking and acting like an average investor and start thinking and acting like the big banks and financial institutions.
The reason one group typically achieves record breaking profits much of the time and the other hardly ever comes close to achieving their financial goals is because the actions of the average investor are nearly opposite of those on Wall Street. Image the financial success you could have if you start making investment decisions like the Wall Street professionals.
At Online Trading Academy, we’ve spent years developing a very low risk wealth building/passive income strategy. This strategy utilizes a multi-prong methodology that leverages predictable monthly income payments which are then utilized to enter directional positions in the stock market (and/or other markets). In other words, you’re able to take advantage of stock market moves without stock market risk to your principal, and no, this is not an annuity. Instead of your investment capital sitting in the stock market with all the risk and fees, why not use interest payments from very safe, short maturity, and investment grade bonds to buy options on stock market moves. This is one of the many simple and safe strategies financial institutions use for their capital. Are you? In our program, students are taught this simple strategy which enables them to think and invest similar to a Wall Street professional. As a result, students participate in stock market gains without exposing their savings to stock market risk.
The next time you make a key financial decision, make sure you’re asking yourself this simple question: Is this decision benefiting you, or your financial advisor?
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