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Become an INVESTOR,with an INVESTOR MENTALITY! June 11, 2008

Posted by shaferfinancial in Uncategorized.
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One of the large problems for folks who have listened to the financial experts is that negative returns can really do damage to one’s retirement planning, especially if it occurs around the time one retires.  Let’s look at what would have happened if a person retired in the year 2000 at the age of 65.  For the sake of argument let’s pretend this person did very well and had $500,000 in his retirement accounts (6 times what the average person had).  This person followed the current wisdom of taking our 5% from the initial account value as income, thinking this would last him throughout retirement.  Let’s pretend this person had his money in a S&P 500 Index Fund with a total expense of .3%.  So this is a best case scenario.

Year                    Income                     Account Value (End of Year)

2000                  $25,000                            $430,350 

2001                   $25,000                           $355,897  

2002                   $25,000                           $256,000

2003                   $25,000                           $297,601

2004                   $25,000                           $301,496

2005                   $25,000                           $289,215

2006                   $25,000                           $305,168

2007                   $25,000                           $294,737

In eight years our 73 year old has an retirement account value which has decreased 41%!  Accounting for official inflation rates the $25,000 now has the buying power of $19,594. With a life expectancy of 17 years for a man and 20 years for a woman, this person is in serious threat of running out of money.  Note, this person has already seen 20% of his/her buying power disappear from the ravages of inflation.  Five out of eight years were positive for the index.  Negative returns hurt!

Now, what do you think the person who was retired would do after a year or two of negative returns?  Might they buckle and decide to get out of the market?  It is a fact that negative return years yield outflows from mutual funds.  This year is no exception.  People who have been taught to think of investing as a risk free endeavor are not emotionally prepared for market downturns, especially when they are close to or are in retirement mode.  It is a psychological fact that we fear pain more than we appreciate pleasure.  So in very real terms we are all risk adverse.  That is why the financial experts have to downplay market risk in order to sell their wares.  So ironically, after they have convinced you to buy those mutual funds, they then need to change the game for you and attempt to have you forget about the pain of market downturns.

Now, to accomplish this the financial expert industry has turned to another dubious fix; amatuer psychoanalysis!  Yes, they are having their clients take tests designed to examine their childhood memories about money in order to get people to stop reacting to market downturns.  You think it will work?

My experience tells me it will take a little more than amatuer psychoanalysis to reorient folks thinking to stop this detrimental behavior.  The buzzword in the industry is “trusted advisor status.”  But, if you are selling the same old snake oil, you are making a mockery of the word “trust.”  Folks, take the time to turn yourself into an investor with an investor mentality then you won’t need to trust anyone else with your money.  Investors know that risk is always there.  Investors have a plan that takes into account market downturns or other bad situations that can occur.  Because it is part of their plan, they don’t feel the need to react to every negative feeling.  Stay the course is more than a mantra with investors, it is the direct result of having a plan that they designed to fit their needs and account for their proclivities.  They own their plan intellectually and most importantly emotionally.  


1. BawldGuy Talking - June 11, 2008

This post is gonna be a nasty wake up call for a bunch of people. I’ve come to believe there’s a magic figure in most folks’ mind. It’s that amount of money saved/invested which gives them the feeling they have it made in the shade.

For most that number is woefully short of the mark.

Panic button indeed.

2. shaferfinancial - June 12, 2008

Yep, I am trying to wake folks up as best I can. The frustrating part is both you and I are out there helping folks to a great retirement, preaching it, and living it, still folks doubt us!

3. richardcorke - September 4, 2008

I’ve just started reading your blogs. Thank you so much for helping the rest of us succeed in the financial aspect of our lives.

4. shaferfinancial - September 4, 2008

Your welcome. It has been a blast!

5. Marc Shaw - October 15, 2009

Hey, I read a lot of blogs on a daily basis and for the most part, people lack substance but, I just wanted to make a quick comment to say GREAT blog!…..I”ll be checking in on a regularly now….Keep up the good work! 🙂

– Marc Shaw

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