Money Matters’ buy, hold, and sell strategy is designed to enable us to participate in the stock market as long it is going up. We see that as an unlimited upside. The strategy also tells us when the market is trending downward so we can get out hopefully before any major damage is done. It can sometimes predict a bear market that doesn’t happen and there could be a small loss or tax consequences. That’s a tolerable downside, in our opinion.
Why do we think this particular strategy is best for our clients who are retired or nearing retirement? One of our foundational philosophies is that we want our clients’ money to last as long as they do. We want to support their standard of living in retirement by helping their investments give them the income they need. In order to do that, we want to protect them from big losses.
Why is protection from big losses so important? Think about it: If you’re living on your investments and the value of your nest egg drops by 20, 30 or even 50 percent, your standard of living should be cut drastically, because your income just fell by that same percentage. In other words, if you’ve been withdrawing 4 percent and your money drops by half, you’d have to take out 8 percent to cover the same costs. That’s a heavy load for your investments to carry.
But if your investments go down by just 5 percent, you’d have to reduce your cost of living by very little. Not only would that be a more tolerable living situation but your investments would recover more quickly. If you do the math, you’ll find that it’s easier to recover from a loss of 5 percent every 2 years than 20 percent every 5 years (don’t forget to subtract 4 percent for cost of living). Our strategy has not produced false alarms every 2 years, but even if it did, our clients would still be better off than if they suffered a big loss every 5 years. We think you’d be better off, too. We’d love to talk to you about investing with an unlimited upside and a tolerable downside.