"The aging process has you firmly in its grip if you never get the urge to throw a snowball." - Doug Larson
"You are as young as your faith, as old as your doubt; as young as your self -confidence, as old as your fear; as young as your hope, as old as your despair." - Douglas MacArthur
"Growing old is mandatory, growing up is optional." - Chili Davis
"Wrinkles should merely indicate where smiles have been." - Mark Twain
OK so this Thanksgiving happens to be just past my 50th birthday so that may be why the topic of aging is at the forefront of my mind this week but then again, as I enter the downhill slide, I join a growing army of veterans and so add to the burgeoning population of older citizens. Now those of you that know me know that I am firmly a part of the third quote above and my son is doing an excellent job of keeping me young at heart but the sad fact is the developed world is aging at a pace not before seen and this is having dire consequences on economic growth.
Japan, Europe and America are all barely growing in terms of population in fact a number of countries have population growth rates below two, the number required to replace the outgoing population. The impact on expected economic growth that this is having is huge as the older generation is not in the habit of large consumption and is in the habit of protecting what they have for retirement. So let's look at each one of these metrics in a little more detail.
Large consumption is typically taken on when a young or middle age couple expand their family, buy houses and cars and invest in businesses. During these years the consumption of everything from automobiles to houses has a massively positive impact on economic growth as demand for goods and services is high. In economies where the bulk of the population is young to middle aged (as was the case in the United States during the baby boom era) annual GDP growth is strong. Companies benefit from a strong consumer and as this makes up over 70% of GDP recessions are short and growth cycles are extensive. As we approach 2014 more and more of these baby boomers are aging thereby slowing the consumption of goods and services while increasing savings in preparation for retirement.
This drag on GDP growth has significant impacts for investments in both bonds and stocks. In a recent study it was found that as populations age the returns to the stock market and the bond market are negatively impacted. This is relatively intuitive as without solid GDP growth and outlook it is hard for stocks and bonds to produce abnormal returns. So it is interesting that the stock market has run so far in the United States when there is the potential long run economic drag of an older population.
On the bond side, as I have argued in my book How to Thrive in the Obama Economy due to this demographic shift there is a high probability that interest rates remain subdued for years to come. Consider that if there were a spike in the 10-year Treasury to say 5%, the demand that would result to lock in that yield after years of sub 3% returns could drive the bond price back up holding interest rates low. It appears to me that the consensus that bond rates will automatically rise does not take into account this growing demographic and their shift in desire from speculation and risk to protection and yield.
With the head winds of the aging population in most advanced countries the obvious solution is to look beyond these for stock investment to the BRIC countries of Brazil, Russia, India and China. Obviously these investments come with a large dose of volatility and risk but certainly the demographic trends are in your favor and if history is once again on your side you would do well to take advantage of the opportunity presented in these markets.
Wednesday, November 27, 2013
Friday, November 22, 2013
The Stealth Tax
"Inflation is when you pay fifteen dollars for a ten dollar haircut that you used to get for five dollars when you had hair." - San Ewing
"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." - Ronald Reagan
"Inflation is taxation without legislation." - Milton Friedman
From the quotes above I am sure that you get the picture, inflation is the stealth tax that decimates retirement planning and steals money right out of your wallet while you stand and watch it happen. There is nothing you can do to stop it but you can prepare for it and if you do this will go a long way to fulfilling your retirement and investment goals.
First of all let's look at the most widely used measure of inflation the Core Inflation rate. Core inflation refers to the long run trend in the price level. What it tries to do is strip out any "noise" or wild swings in prices caused by one off exogenous shocks, say for example a temporary spike in the price of gasoline due to a strike at the refinery. The problem is that doing this strips out the most volatile items namely energy and food and these two items account for a large portion of most individuals monthly budget. Now the question is how is the Core Inflation calculated?
Well there are numerous ways to calculate this number. The most widely used methodology is the Consumer Price Index or CPI. This measure was used by the Federal Reserve for years but has recently been dropped for Personal Consumption Expenditures Price Index or PCE. Many people still rely on the CPI as a gauge for inflation, for example social security payments are index to the CPI so let's look at how the CPI is calculated. Essentially CPI is a basket of consumer goods excluding food and gasoline. The idea is that as this basket of goods changes prices a relative measure of inflation is calculated. The problem with this concept is that while consumers change their buying habits fairly regularly the basket of goods was set for an extended period.
For this reason the Federal Reserve recently changed over to use the PCE. This takes into account the ever changing consumer preference for different items and has resulted in a lower number being calculated for the United States inflation rate by about 30%. This is significant in that the Federal Reserve has as its mantra to keep a lid on inflation and by changing the way that they calculate inflation they have magically lowered inflation.
Another problem with calculating inflation is that it is extremely difficult to adjust prices for the improvement or benefit from using say an iPhone 5 versus an iPhone 4. The 5 may cost more but if there is a benefit from an improvement in living standards then just looking at the price increase is not capturing the improvement and so the Federal reserve makes an adjustment for this lowering once again the inflation rate. In addition to this adjustment they also make seasonal adjustments to strip out seasonal influences on prices thereby tinkering again with the published rate.
So what is the real rate of inflation? Well as we have seen the number published is anything but accurate. It serves a purpose for the Federal Reserve but really has no bearing on the rate of inflation that you personally bear. You buy gasoline and food and I am sure that your basket of goods is vastly different from the Federal Reserve's published basket. In fact not only is your basket different from the Feds but it is more than likely different from mine. This means that your inflation rate is different from mine and, if you want to get nit picky, different from everyone else's. To dig even deeper, even if you buy exactly the same things as your next door neighbor if the timing of the purchases is different there is a high probability that you will pay different prices.
So while we all have a different inflation rate it is this inflation rate that you need to consider when you look to a real rate of return on your investments. The real rate refers to the rate of return in excess of the inflation rate. This is the rate at which your portfolio is actually growing as inflation is eating away at the rest of the returns. This is why it is important to not only review your spending habits to determine a personal rate of inflation but it is critically important to factor in the rate of inflation and the impact it is having on your portfolio returns. Turning a blind eye to the rate of inflation will severely impact your ability to retire happily as the stealth tax will destroy your portfolio much like termites destroy a wooden house.
"Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." - Ronald Reagan
"Inflation is taxation without legislation." - Milton Friedman
From the quotes above I am sure that you get the picture, inflation is the stealth tax that decimates retirement planning and steals money right out of your wallet while you stand and watch it happen. There is nothing you can do to stop it but you can prepare for it and if you do this will go a long way to fulfilling your retirement and investment goals.
First of all let's look at the most widely used measure of inflation the Core Inflation rate. Core inflation refers to the long run trend in the price level. What it tries to do is strip out any "noise" or wild swings in prices caused by one off exogenous shocks, say for example a temporary spike in the price of gasoline due to a strike at the refinery. The problem is that doing this strips out the most volatile items namely energy and food and these two items account for a large portion of most individuals monthly budget. Now the question is how is the Core Inflation calculated?
Well there are numerous ways to calculate this number. The most widely used methodology is the Consumer Price Index or CPI. This measure was used by the Federal Reserve for years but has recently been dropped for Personal Consumption Expenditures Price Index or PCE. Many people still rely on the CPI as a gauge for inflation, for example social security payments are index to the CPI so let's look at how the CPI is calculated. Essentially CPI is a basket of consumer goods excluding food and gasoline. The idea is that as this basket of goods changes prices a relative measure of inflation is calculated. The problem with this concept is that while consumers change their buying habits fairly regularly the basket of goods was set for an extended period.
For this reason the Federal Reserve recently changed over to use the PCE. This takes into account the ever changing consumer preference for different items and has resulted in a lower number being calculated for the United States inflation rate by about 30%. This is significant in that the Federal Reserve has as its mantra to keep a lid on inflation and by changing the way that they calculate inflation they have magically lowered inflation.
Another problem with calculating inflation is that it is extremely difficult to adjust prices for the improvement or benefit from using say an iPhone 5 versus an iPhone 4. The 5 may cost more but if there is a benefit from an improvement in living standards then just looking at the price increase is not capturing the improvement and so the Federal reserve makes an adjustment for this lowering once again the inflation rate. In addition to this adjustment they also make seasonal adjustments to strip out seasonal influences on prices thereby tinkering again with the published rate.
So what is the real rate of inflation? Well as we have seen the number published is anything but accurate. It serves a purpose for the Federal Reserve but really has no bearing on the rate of inflation that you personally bear. You buy gasoline and food and I am sure that your basket of goods is vastly different from the Federal Reserve's published basket. In fact not only is your basket different from the Feds but it is more than likely different from mine. This means that your inflation rate is different from mine and, if you want to get nit picky, different from everyone else's. To dig even deeper, even if you buy exactly the same things as your next door neighbor if the timing of the purchases is different there is a high probability that you will pay different prices.
So while we all have a different inflation rate it is this inflation rate that you need to consider when you look to a real rate of return on your investments. The real rate refers to the rate of return in excess of the inflation rate. This is the rate at which your portfolio is actually growing as inflation is eating away at the rest of the returns. This is why it is important to not only review your spending habits to determine a personal rate of inflation but it is critically important to factor in the rate of inflation and the impact it is having on your portfolio returns. Turning a blind eye to the rate of inflation will severely impact your ability to retire happily as the stealth tax will destroy your portfolio much like termites destroy a wooden house.
Friday, November 15, 2013
The Portfolio Doctors
"It is not true that I had nothing on, I had the radio on." - Marilyn Monroe
"It's so sweet, I feel like my teeth are rotting when I listen to the radio." - Bono
Today is a very special day in the life of Steve Bick in that today is the day that my radio show, The Portfolio Doctors, airs for the very first time. Together with a good friend and trusted advisor, Dan Osgood, our show will air weekly on Friday on ESPN 1700 radio at 2pm. Now the reason I am telling you this is not only to broadcast the new show but because I could not help myself, I had to tell the world to wake up!
In my wanderings and dealings with people across the globe there is a common complacency regarding retirement and investments. In general investing is seen as a gamble, a crap shoot or a number of other derogatory words, so you may as well just lump your hard earned money in with everyone else and earn what everyone else is earning. This is short sighted and irresponsible for the simple reason that protecting and ensuring your financial future is your responsibility and ignoring this fact is to jeopardize your well being in your retirement years.
If you truly think that anyone will take the care required to nurture your retirement portfolio as well as you think again. Your inflation rate is different from everyone else, your goals are different from everyone else, your risk tolerance is different from everyone else, yet in the main you invest in the same portfolios as everyone else. Why? For the simple reason that it is easy and convenient and you do not have to take responsibility for any losses. If it goes down, well so did everyone else. This is a cop out and will not serve you well going forward because the markets are setting you up for failure. Interest rates are at historic lows and the market is at historic highs all on the back of a weak economy. Blindly allocating money to a basket of stocks and bonds will not provide you the retirement that you need.
It is time to take the bull by the horns and face the reality that you need to become highly skilled and educated in managing your investment portfolio. Now I am not saying that you need to become a skilled trader, but you do need to start studying your options outside of the norm and understand how the macro economic environment will affect your portfolio. Beyond that, you need to know where to look to find safety and how to protect your fragile basket of investments and turn them into an anti-fragile basket of investments. This is the aim of the show, to educate you and to show you a path to success or at worst to help your sidestep some common mistakes enabling you to proper and retire not only in comfort but in the knowledge that you have the understanding and ability to weather the storms ahead.
I encourage you not only to listen to the show but to let your friends and family know about the show as it may benefit them as well. For those of your that work during those hours we will be posting a podcast on our website at www.theportfoliodoctors.com weekly. Finally if any of you would like to advertise or be on the show to share your experiences and wisdom let me know and we can discuss how you can get involved. Let's spread the word and make sure that our future is prosperous.
"It's so sweet, I feel like my teeth are rotting when I listen to the radio." - Bono
Today is a very special day in the life of Steve Bick in that today is the day that my radio show, The Portfolio Doctors, airs for the very first time. Together with a good friend and trusted advisor, Dan Osgood, our show will air weekly on Friday on ESPN 1700 radio at 2pm. Now the reason I am telling you this is not only to broadcast the new show but because I could not help myself, I had to tell the world to wake up!
In my wanderings and dealings with people across the globe there is a common complacency regarding retirement and investments. In general investing is seen as a gamble, a crap shoot or a number of other derogatory words, so you may as well just lump your hard earned money in with everyone else and earn what everyone else is earning. This is short sighted and irresponsible for the simple reason that protecting and ensuring your financial future is your responsibility and ignoring this fact is to jeopardize your well being in your retirement years.
If you truly think that anyone will take the care required to nurture your retirement portfolio as well as you think again. Your inflation rate is different from everyone else, your goals are different from everyone else, your risk tolerance is different from everyone else, yet in the main you invest in the same portfolios as everyone else. Why? For the simple reason that it is easy and convenient and you do not have to take responsibility for any losses. If it goes down, well so did everyone else. This is a cop out and will not serve you well going forward because the markets are setting you up for failure. Interest rates are at historic lows and the market is at historic highs all on the back of a weak economy. Blindly allocating money to a basket of stocks and bonds will not provide you the retirement that you need.
It is time to take the bull by the horns and face the reality that you need to become highly skilled and educated in managing your investment portfolio. Now I am not saying that you need to become a skilled trader, but you do need to start studying your options outside of the norm and understand how the macro economic environment will affect your portfolio. Beyond that, you need to know where to look to find safety and how to protect your fragile basket of investments and turn them into an anti-fragile basket of investments. This is the aim of the show, to educate you and to show you a path to success or at worst to help your sidestep some common mistakes enabling you to proper and retire not only in comfort but in the knowledge that you have the understanding and ability to weather the storms ahead.
I encourage you not only to listen to the show but to let your friends and family know about the show as it may benefit them as well. For those of your that work during those hours we will be posting a podcast on our website at www.theportfoliodoctors.com weekly. Finally if any of you would like to advertise or be on the show to share your experiences and wisdom let me know and we can discuss how you can get involved. Let's spread the word and make sure that our future is prosperous.
Friday, November 8, 2013
Back to the Future!
Here is an excerpt from the movie Back to the Future in which Dr. Emmett Brown who is now in 1955 is doubting Marty McFly's story that he is from the future:
Brown: Then tell me, future boy, who's President of the United States in 1985?
Marty: Ronald Reagan
Brown: Ronald Reagan? The actor? [Chuckles in disbelief] Then who's vice president? Jerry Lewis? I suppose Jane Wyman is the First Lady?
Marty: Whoa, wait, Doc!
Brown: And Jack Benny is secretary of the treasury?
Marty standing outside the lab: Doc, you gotta listen to me.
Brown opening the door: I've had enough practical jokes for one evening. Good night future boy!
Slams the door leaving Marty outside.
Back to the Future is one of my favorite movies. Dr. Emmett Brown has invented a time machine and the two have some fantastic adventures rushing back and forth through time trying desperately to adjust things so that what happened in the future is "fixed" before it happens. The reason Marty is back in 1955 is to warn "Doc" that he will be shot by some Arabs who are annoyed that he stole their plutonium to run the time machine. After much trying "Doc" reads the note and saves himself thereby altering future events.
The same thing is happening the world over in the halls of the central bankers. They are desperately trying to make it "different this time". The funny thing is that they are using the same old tools, printing money and lowering interest rates to unsustainable levels. This methodology has never worked in the past and therefore should not work in the future. The sad part about it is that they are convinced that this time it will work and that the last time we just did not print enough. Their theory is that maybe plutonium is not strong enough so let's use something stronger! The problem is that more force with the wrong tools will provide the same result.
One area where the results are the same is the stock market. This week Twitter became a public company. The fact that they have never turned a profit did not keep the speculators from pouring in to grab a slice of the action driving Twitter's stock up 95% above the IPO price on day one. The current market capitalization of a money losing company is now $31 billion but that is fine because apparently the company growth will dig them right out of this hole! This speculative frenzy smacks of 1999. Back then I was a pretty green investor as all I had ever really known was a bull market so I would have jumped all over this issue and pocketed a fairly large amount of money. The problem is that when 2000 hit I was hit upside down very quickly and as easily as the money had arrived it left.
Fast forward to 2013 and things are once again out of control. There are tons of companies that are way overvalued and continue higher. Tesla, Amazon and Twitter are just the tip of the iceberg. Behind this come the denizens of momentum stocks that continue to soar with every billion dollars printed at the Federal Reserve. The problem is that this time the economy is still weak with millions on food stamps and massive budget deficits. Furthermore the currency continues to strengthen as countries around the world try to debase their currency in order to stimulate exports. Nothing is working other than the stock market spiraling out of control higher and the mountain of debt climbing at an astonishing rate.
Looking forward to 2014 could also be like going Back to the Future in that it could be the next seven year itch. Think about it 2000 and 2007 were disastrous years for the markets. Furthermore 2007 was far worse than 2000 for the simple reason that the amount of stimulus was far greater in 2003 and 2004 than it had been in 1998 and 1999. This time around the stimulus is higher by multiples of 100. So if you thought 2007 was painful do not expect next time to be better. Ensure that that you learn from the past because believe me the current tinkering will not change the outcome. The only thing I do know is that if plutonium created the 2007 explosion then I am not looking forward to the result when this new super fuels ignites.
Brown: Then tell me, future boy, who's President of the United States in 1985?
Marty: Ronald Reagan
Brown: Ronald Reagan? The actor? [Chuckles in disbelief] Then who's vice president? Jerry Lewis? I suppose Jane Wyman is the First Lady?
Marty: Whoa, wait, Doc!
Brown: And Jack Benny is secretary of the treasury?
Marty standing outside the lab: Doc, you gotta listen to me.
Brown opening the door: I've had enough practical jokes for one evening. Good night future boy!
Slams the door leaving Marty outside.
Back to the Future is one of my favorite movies. Dr. Emmett Brown has invented a time machine and the two have some fantastic adventures rushing back and forth through time trying desperately to adjust things so that what happened in the future is "fixed" before it happens. The reason Marty is back in 1955 is to warn "Doc" that he will be shot by some Arabs who are annoyed that he stole their plutonium to run the time machine. After much trying "Doc" reads the note and saves himself thereby altering future events.
The same thing is happening the world over in the halls of the central bankers. They are desperately trying to make it "different this time". The funny thing is that they are using the same old tools, printing money and lowering interest rates to unsustainable levels. This methodology has never worked in the past and therefore should not work in the future. The sad part about it is that they are convinced that this time it will work and that the last time we just did not print enough. Their theory is that maybe plutonium is not strong enough so let's use something stronger! The problem is that more force with the wrong tools will provide the same result.
One area where the results are the same is the stock market. This week Twitter became a public company. The fact that they have never turned a profit did not keep the speculators from pouring in to grab a slice of the action driving Twitter's stock up 95% above the IPO price on day one. The current market capitalization of a money losing company is now $31 billion but that is fine because apparently the company growth will dig them right out of this hole! This speculative frenzy smacks of 1999. Back then I was a pretty green investor as all I had ever really known was a bull market so I would have jumped all over this issue and pocketed a fairly large amount of money. The problem is that when 2000 hit I was hit upside down very quickly and as easily as the money had arrived it left.
Fast forward to 2013 and things are once again out of control. There are tons of companies that are way overvalued and continue higher. Tesla, Amazon and Twitter are just the tip of the iceberg. Behind this come the denizens of momentum stocks that continue to soar with every billion dollars printed at the Federal Reserve. The problem is that this time the economy is still weak with millions on food stamps and massive budget deficits. Furthermore the currency continues to strengthen as countries around the world try to debase their currency in order to stimulate exports. Nothing is working other than the stock market spiraling out of control higher and the mountain of debt climbing at an astonishing rate.
Looking forward to 2014 could also be like going Back to the Future in that it could be the next seven year itch. Think about it 2000 and 2007 were disastrous years for the markets. Furthermore 2007 was far worse than 2000 for the simple reason that the amount of stimulus was far greater in 2003 and 2004 than it had been in 1998 and 1999. This time around the stimulus is higher by multiples of 100. So if you thought 2007 was painful do not expect next time to be better. Ensure that that you learn from the past because believe me the current tinkering will not change the outcome. The only thing I do know is that if plutonium created the 2007 explosion then I am not looking forward to the result when this new super fuels ignites.
Friday, November 1, 2013
Volatility - Life's Strengthener
"It's a lot of random situations that combine in a certain volatile form and create a bigger-than-the-whole situation that nobody could have predicted." - Paul Kantner
As investors we love to try to predict future events. Predicting them correctly gives you an edge and will make you a lot of money so people spend countless hours creating models that they think will capture the majority of future events. Using these models they construct portfolios that will benefit from these predictions but more often than not the predictions turn out to be hopelessly poor and future events are not even remotely close to the predictions. When an analyst guesses correctly (and I use the word guess rather than predict) he or she is an instant media sensation and all future predictions are taken very seriously. Take Meredith Whitney or Noriel Roubini as two examples. Both predicted massive economic collapses and both are now hero worshiped but since that one time prediction they have had limited success but for some reason people continue to take note whenever they speak.
Volatility is seen as investment risk. The more volatile the markets (volatility refers to the movements up and down in the market, the more the market gyrates the higher the volatility) the higher the risk for the simple reason that trying to predict future market moves when it is gyrating around furiously is almost impossible. For this reason investors tend to buy and hold rather than trade the market. Buying the market locks in market rates of return and for most that is a simple way of investing. Do not worry about daily market movements and rely on history to repeat itself with a continued long term rate of return in excess of 8 percent. The problem with this strategy is that you never can predict when you will require the money. What if you fall ill or lose your job? Typically both or one of these events occurs right at market lows as the economy is weak causing layoffs and illness due to stress and anxiety. So right when you need the money the value of your portfolio is at its lowest. Withdrawing funds at this point is not optimal which is one of a litany of reasons why the majority of investors receive sub par returns.
Volatility in nature however has been used to strengthen the whole. Nature has had to deal with unknown events for billions of years and the results are humans. Every time something spectacular occurs nature's resilience allows it to use the catastrophe to become stronger allowing future generations to benefit from the event by being immune to future events similar to the last one. What nature realizes though is that while you can try to prepare for the unknown it is just that, unknown so the best thing that you can do is to latch on to the strongest cells, the ones that survive the catastrophe, allowing the weak ones to die and so evolve into a stronger organism. That said there are events that could wipe humanity off the earth but nature will once again evolve into something stronger and revive itself at the expense of the weaker race of humans.
So one thing we know is that volatility is here to stay. As much as the Federal Reserve and an army of Wall Street investment bankers try to hammer it into line the more it wiggles. In trying to box volatility in it creates a wild untamed beast that eventually finds an exit and once it does it creates havoc with portfolios around the globe. Furthermore as the globe becomes more and more joined at the hip economically speaking the greater the volatility and the less control one Federal Reserve has against the growing multitude of global problems.
Now what if instead of fearing volatility and the effects that it has on your portfolio you embrace it by creating a portfolio that benefits from increased volatility? In his book Antifragile Nassim Taleb suggests that this is the best way to invest and I have to say that I agree. In fact this is one of the main themes to my recent book How to thrive in the Obama economy and I am proud to say that I had not read Taleb's book prior to writing mine. Creating this type of portfolio is possible but it will take some effort and education on your part but I advise you that it will be well worth your time and effort as not implementing these strategies will play havoc with your portfolio and your retirement options. For this reason I am launching a radio show on November 15 on ESPN 1700 AM radio that will attempt to educate people of the pitfalls of investing your hard earned money in a "normal" portfolio and will give ideas as to where to look to create a portfolio that becomes stronger the worse things get and believe me they are not going to get any smoother. I invite you to read my book and tune in on Friday afternoons between 2 and 3pm as we launch the show and try to help you achieve your investment goals but outside of this it is extremely important that you ensure that your portfolio benefits from these major market gyrations rather than implodes.
As investors we love to try to predict future events. Predicting them correctly gives you an edge and will make you a lot of money so people spend countless hours creating models that they think will capture the majority of future events. Using these models they construct portfolios that will benefit from these predictions but more often than not the predictions turn out to be hopelessly poor and future events are not even remotely close to the predictions. When an analyst guesses correctly (and I use the word guess rather than predict) he or she is an instant media sensation and all future predictions are taken very seriously. Take Meredith Whitney or Noriel Roubini as two examples. Both predicted massive economic collapses and both are now hero worshiped but since that one time prediction they have had limited success but for some reason people continue to take note whenever they speak.
Volatility is seen as investment risk. The more volatile the markets (volatility refers to the movements up and down in the market, the more the market gyrates the higher the volatility) the higher the risk for the simple reason that trying to predict future market moves when it is gyrating around furiously is almost impossible. For this reason investors tend to buy and hold rather than trade the market. Buying the market locks in market rates of return and for most that is a simple way of investing. Do not worry about daily market movements and rely on history to repeat itself with a continued long term rate of return in excess of 8 percent. The problem with this strategy is that you never can predict when you will require the money. What if you fall ill or lose your job? Typically both or one of these events occurs right at market lows as the economy is weak causing layoffs and illness due to stress and anxiety. So right when you need the money the value of your portfolio is at its lowest. Withdrawing funds at this point is not optimal which is one of a litany of reasons why the majority of investors receive sub par returns.
Volatility in nature however has been used to strengthen the whole. Nature has had to deal with unknown events for billions of years and the results are humans. Every time something spectacular occurs nature's resilience allows it to use the catastrophe to become stronger allowing future generations to benefit from the event by being immune to future events similar to the last one. What nature realizes though is that while you can try to prepare for the unknown it is just that, unknown so the best thing that you can do is to latch on to the strongest cells, the ones that survive the catastrophe, allowing the weak ones to die and so evolve into a stronger organism. That said there are events that could wipe humanity off the earth but nature will once again evolve into something stronger and revive itself at the expense of the weaker race of humans.
So one thing we know is that volatility is here to stay. As much as the Federal Reserve and an army of Wall Street investment bankers try to hammer it into line the more it wiggles. In trying to box volatility in it creates a wild untamed beast that eventually finds an exit and once it does it creates havoc with portfolios around the globe. Furthermore as the globe becomes more and more joined at the hip economically speaking the greater the volatility and the less control one Federal Reserve has against the growing multitude of global problems.
Now what if instead of fearing volatility and the effects that it has on your portfolio you embrace it by creating a portfolio that benefits from increased volatility? In his book Antifragile Nassim Taleb suggests that this is the best way to invest and I have to say that I agree. In fact this is one of the main themes to my recent book How to thrive in the Obama economy and I am proud to say that I had not read Taleb's book prior to writing mine. Creating this type of portfolio is possible but it will take some effort and education on your part but I advise you that it will be well worth your time and effort as not implementing these strategies will play havoc with your portfolio and your retirement options. For this reason I am launching a radio show on November 15 on ESPN 1700 AM radio that will attempt to educate people of the pitfalls of investing your hard earned money in a "normal" portfolio and will give ideas as to where to look to create a portfolio that becomes stronger the worse things get and believe me they are not going to get any smoother. I invite you to read my book and tune in on Friday afternoons between 2 and 3pm as we launch the show and try to help you achieve your investment goals but outside of this it is extremely important that you ensure that your portfolio benefits from these major market gyrations rather than implodes.
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