5 reasons Americans continue to choose market volatility over steady growthArticle added by Patrick Kelly on October 3, 2011
Joined: September 22, 2011
Ranked: #42 (1,438 pts)
Buy stocks. Buy mutual funds. Invest in equities. Stuff your 401(k) with as much money as you can and make sure it’s all in the market. It’s no wonder the majority of the retirement-saving public is doing just that — it’s the only message they’ve really ever heard. It’s our turn to tell our story — the public is eager to hear it, but only you can tell it.
Let me ask you a question. If you were going to set sail across the entire Pacific Ocean in a small sailboat and could somehow guarantee the type of seas you would encounter, what would you ask for? Calm water and sunny skies, or violent storms and gigantic waves?
Seems a silly question, doesn’t it? We would all choose blue skies and smooth waters. That type of voyage would allow us to sleep peacefully at night and experience the full joy of our journey.
So why is it then that these same individuals — your father, your sister, your neighbor, your family doctor, (maybe even you) — continue to opt for the stormy seas of stock market losses and the insane tidal wave of volatility? It’s a rough ride with an unknown destination. One minute you’re sitting atop a huge wave of gains, able to clearly see your retirement horizon, and the next minute you’re plunging into a dark trough of fear and panic as your account racks up a string of devastating losses.
While the turbulence of equities may not threaten to take your life like a blue-water voyage, it does threaten to rob you and your clients of a prosperous and peaceful retirement.
Here are five reasons why the masses continue to choose this insane madness:
1. They don’t know of another option
Most of your clients and prospects have only heard one message all their adult life: Buy stocks. Buy mutual funds. Invest in equities. Stuff your 401(k) with as much money as you can and make sure it’s all in the market. It’s no wonder the majority of the retirement-saving public is doing just that — it’s the only message they’ve really ever heard.
They have no idea that there is another ship going in the same direction; a ship that is sailing in calm waters with no fear of capsizing or loss; a ship their stockbroker and benefits administrator likely knows nothing about; a ship to which only you hold the tickets for passage.
One of the most shocking revelations of my last four years has been the realization of just how few agents in our industry really understand their own product: how it works, and just as importantly, how to explain it to their clients. Don’t be that agent. Study the product, know the options and invite everyone you know to take a tour of this great vessel.
2. The myth that nothing can compete with equity returns
Throughout history, the stock market has been a vehicle for robust returns. There was a time not long ago when individuals could simply buy good, well-run companies and hold that position their entire lives. That’s how Warren Buffett amassed his fortune, right? And who can argue with Warren?
Here’s the problem. Those days are done. We no longer live in a buy and hold environment. Information is too readily available. Change is too rapid. Last year’s industry leader can become this year’s Chapter 7. We saw this in spades during the 2008-2009 credit crisis.
So if the buy and hold strategy might not provide today’s solution, what will? Simple. Capturing some of the stock market’s upside in its good years, and avoiding losses in its bad years. That’s the key.
Think of it this way. Would a baseball player’s batting average be better if he hit a home run every second time at bat and he struck out the other or if he simply hit a single every time he came to the plate and never struck out? I’d take the second batting average every time, and so would your clients. That is what we have to offer — steady growth with no strikeouts. Can you say batter up?
3. No one’s offering to help the middle market
I remember a number of years ago a large brokerage firm sending all of their individual clients to an 800 number call center unless they had at least $100,000 of assets under management. Their message was clear. They only wanted to work with the rich.
Let me tell you a secret. Okay, it’s not much of a secret, but it might change your practice. Here it is.
Everyone wants to work with the affluent, high-net-worth client. They're the same 5 percent (or less) that every other advisor is going after as well. While there is nothing wrong with that model, I believe it is shortsighted. There is a vast majority of the population, right now, today, that needs your help, that wants your help, that’s crying for your help —– it’s called the middle market.
Yes, wealthy clients are nice, but just as they are not the backbone of this country, neither are they the bread and butter of most dynamic and growing practices. Most advisors are trying to lead that one prize-winning pony to their water trough; the only problem is the pony isn’t thirsty because every other advisor has put a water bucket in front of them as well, all the while ignoring the pastures full of horses who are dying of thirst right in their own back yard.
4. It’s the way it’s always been done
Precedence is a tough thing to break. We have seen much of the previous generation build a lavish retirement completely through equities, and we think that if it worked for them it certainly should work for us. Unfortunately that’s no more true than watching someone place a large bet on red at the roulette table (and win) and then rationalizing that since it worked for them, it will certainly work for us. Ridiculous. Sometimes history should be our guide and sometimes it shouldn’t. The roulette wheel is one example and the stock market is another.
Remember one thing: No one knows what the stock market is going to do next year, next month or even in the next hour. Remember that. No one knows, just like no one can predict whether that next spin will be red or black. History is, unfortunately, no help.
5. Too limited a view
Here’s part of our problem as a nation: Our view is too limited and too narrow. If it hasn’t happened before in America, then we’ve brainwashed ourselves into believing that it never will. Yeah, right. Tell that to the Romans.
The problem with our stock market is that the major indexes have always returned to new, all-time highs after each downturn, recession or depression (other than the NASDAQ after the 2001 tech bubble). It’s been up, up and away … forever. So the thinking quickly becomes, “Sure, it has some bumps and bruises along the way but it will always go up; always return to new highs."
Just because that has been the story of America up to this point does not mean it will always be our story.
Case in point, let’s look at Japan. As I write this article, the leading Japanese stock index, the Nikkei 225, sits at 8,793.12. It peaked almost 22 years ago on December 29, 1989, at just below 39,000 points. Yes, 39,000. So what does that mean?
You got it. Japan’s leading stock market index is still down almost 77.5 percent nearly 22 years after it hit its peak. That means that $1,000 left in that index over the last 22 years (without taking inflation into account) is now worth only $225. How’s that for a great buy and hold strategy?
Like I said, just because it hasn’t happened in America yet doesn’t mean it will never happen.
So here’s the good news and the bad news. Bad news first.
The bad news is that many of the people currently saving for retirement are no longer even aboard their ship in these stormy seas; rather, they’ve been washed off the deck and into the freezing water itself. They are drowning, crying for help and desperately hoping to make it out alive. Their ship has sunk, their hope has vanished and they are paddling for their lives.
But here’s the good news: You are right behind them and you hold their life ring. The only question is, will you toss it?
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