How’s the market treating you this year? Is your account underperforming a flat market?
There are bound to be a whole lot of brows furrowed over pathetic retirement account statements this year.
I feel for the people stuck in this situation. They have been hoodwinked… yet it is ultimately their fault.
The classic “buy and hold” strategies that have been pushed on us through retirement plans, by brokers, and by every other player with a stake in the rigged system are dead.
But instead of changing their approach, most investors just sit there and take it.
I hope you aren’t one of them, because there’s been proof for decades that “buy and hold” is flawed…
The Proof
Robert Shiller is an American economist and best-selling author, as well as the Arthur M. Okun Professor of Economics at Yale University. His book Irrational Exuberance was published in 1981 to little fanfare. A second version was republished a couple years ago.
By the time the original version was published, the big brokerages and investors had latched onto the “buy and hold” strategy for smaller investors, and it was the only brand of advice available.
While large clients were privy to more active management and expert advice, individual investors were being used to pad returns.
For years, an entire industry has worked to keep small investors fully invested in the stock market at all times — no matter how high stocks climbed.
The concept is pretty simple in its ruthlessness: While small investors rarely react quickly enough through their brokers to limit losses during a downturn, the increased investment in equities allows the big boys to get out before everyone else.
At the same time, brokerages have much larger account balances to work with as a whole, which limits overall risk and allows larger positions for more aggressive and exotic star traders.
It’s a win-win scenario for the players that actually matter in the eyes of large financial institutions.
The core of Shiller’s work was based on overvaluation in the markets. He used the “Cyclically-Adjusted Price-to-Earnings Ratio,” now also known as “the Shiller PE.” This compares stock prices with after-tax company earnings after those earnings are adjusted to take into account the fluctuations of the economic cycle.
The point of this is to avoid the distortions commonly found when you compare stock prices to a single year’s earnings.
At the peak of a boom, earnings are artificially inflated, while at the trough they are artificially depressed.
The Shiller PE smooths out the peaks and troughs and presents reasonably accurate long-term data.
Take a look at where we are now:
Considering the historical average for the Shiller PE ratio is around 20.6, we’re about 25% over the average — and a long way from the historical lows.
Another aspect of the chart that should be blatantly obvious is the massive exponential swing from 1981 through 2000. This is what years of “buy and hold” investment advice did to the market.
The constant effort by financial institutions to get small investors to buy and hold paid off. No matter what happened in our economy, they kept pushing to keep people invested.
Before the markets crashed, they were overvalued by about $12 trillion. There was only one direction for the market to go in the long run — yet financial experts were happy to throw individual investors under the bus to squeeze out a little more in profits before the inevitable correction.
The Cost
A professor at the IESE Business School at the University of Navarra in Spain, Javier Estrada, conducted several long-term studies years ago.
He found an interesting effect that clearly bolsters Shiller’s data: Over an investing period of about 40 years, missing the 10 best days would have cost you about 50% of your capital gains… However, an investor who successfully avoided the 10 worst days would have 250% more in capital gains than someone who simply stayed in the whole time.
This goes to show that anyone advocating a buy and hold strategy is only doing half the work — and dramatically limiting potential gains for their clients.
There also isn’t much you can do about your 401(k) due to the undoubtedly limited options you can access. Take matching funds from your employer, and don’t put an extra penny in the account.
Starting a Roth IRA is probably your best bet for any extra retirement savings. You’ll get hit with taxes now, but tax rates are relatively low compared to historic averages.
Plus, we’ll undoubtedly see higher tax rates to fund interest payments on ballooning debt and mandatory spending in the near future.
Of course, there are plenty of good brokers and financial advisors out there looking out for their clients’ best interests… My intention is not to paint all investment advisors with the same crooked brush.
However, the only real way to be sure the advice you’re receiving is impartial — and not designed for a brokerage firm’s bottom line — is to remove the profit incentive for others from trades.
That said, one of the best aspects of working for a financial research publishing company like the Outsider Club is that our success isn’t measured by manipulating investors, but instead by our readers’ success with our research — and our ability to continue to satisfy them with the quality of our research.
Our editors have free rein to make the impartial buy and sell calls needed to maximize potential gains.
Odds are your broker or brokerage hasn’t come close to what Nick Hodge has given his readers. He clued them in to a company that has delivered gains over 100% in the last year AND could easily double again.
Check out his Early Advantage newsletter for more details…
