Going Broke Safely.

There continues to be investors wary of the stock market. Many, if not most, watch all the talking heads on the financial news programs. These talking heads or Wall Street bullies continually scare investors on what is about to happen. These bullies need investors to believe that there is someone who tell them what to buy and sell and when.

Investment Conference
Investment Conference (Photo credit: Salmaan Taseer)

These predictions are totally worthless.

We know the stock market is unpredictable and random. We know that over the long term market returns will keep you well ahead of inflation. We know that in order for us to achieve this return we must deal with the short term volatility.

Many of us cannot deal with this volatility and therefore seek the ‘safety’ of Treasury bills or CDs or fixed annuities or cash. These ‘safe’ investments have risks of their own.

The historic “Risk Free Rate” is about 4%, the risk free rate is the historic return on government guaranteed T-bills. Think of them as CDs issued by Uncle Sam. They have a very low return but virtually no volatility.

They seem like a sure thing, but after inflation and taxes, the only thing that’s for certain is long-term losses. It’s the safest way to go broke.

You should realize that the important thing is your real return. Real return is your return minus the inflation rate. For example, if your CD earns 1.5% and the rate of inflation is 3.0% you have a real return of -1.5%. And this is before you pay taxes on your 1.5% return. So in this case you lose purchasing power of your money. Of course you lose your money safely.

The reality of the 2008-9 crisis continues to be on the mind of all Americans. The perception that another crisis is imminent will affect our investment decisions going forward.

For this reason the need for a true investor coach is even more vital.

To succeed in investing we must develop a prudent strategy, one which is customized for YOU. It should be backed by academic and scientific research.

Once developed, a coach will help you remain disciplined to your strategy and your long term goals.

We must remove our emotions from the investing process.

To succeed in long term investing we should:

  • Own equities
  • Globally diversify
  • Rebalance

Stay focused on the long term.

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