The Best Way to Create a Retirement Income Plan

Scott Peterson was a guest writer on the popular White Coat Investor blog—a blog esteemed amongst physicians and other high-income professionals. Scott’s blog outlines our proprietary process for investing, The Perennial Income Model™. The article also presents a retirement income plan creation example of a couple who have accumulated $1 million for their retirement.

Click here to read Scott’s blog in its entirety on

Preparing for, and Dealing with, Market Turbulence

At Peterson Wealth Advisors, we manage the retirements of several retired commercial pilots. As I have discussed these pilots’ careers with them, one of the retired pilots explained that being a pilot can be described as, “hours and hours of boredom punctuated by moments of sheer terror.” Although these moments of sheer terror are rare, pilots will spend countless hours of training throughout their careers. They are preparing for that moment when their flight plan might not go according to plan.

Just as pilots have a plan, investors also need to have a plan to follow when their investments are not going according to plan. The last couple of years have provided investors ample unplanned and unforeseen market turbulence. A pandemic, a supply chain crisis, the highest inflation rate in our lifetimes, and the prospects of another world war in Europe have certainly rocked the investment world. It’s even caused the best-made investment plans to not go according to plan.

Investors should always be asking, “what is my plan when things temporarily aren’t going according to plan?” Let me share with you the Peterson Wealth Advisors’ perspective and what we are doing for our clients. Especially when it appears that things aren’t going according to plan due to ‘investment turbulence’.

Embrace the Volatility

First, temporary downturns are not a deviation from the plan. Rather, they are an expected part of the plan. Stock and bond market downturns are always temporary. Historically the duration of almost every major decline is measured in months, not years. The media would have you think that market corrections, “are unexpected events that are shocking in both their occurrence as well as their impact.” As investors with longer-term perspectives, we understand that the price you pay for inflation-beating investment returns consist of enduring occasional periods of market volatility. Few of us would pass up a Hawaiian vacation because there will surely be some turbulence in our flight to and from Hawaii. We likewise need to keep temporary market downturns in perspective and remember that turbulence is a planned for event.

Even though the exact timing of a correction is difficult, we should expect and even embrace market volatility. Investors should seize the opportunity to make wise tax moves during declining markets by doing Roth conversions, rebalancing portfolios, and tax-loss harvesting. They should also be opportunistic by purchasing depreciated equities while they are being sold on discount.

Protect Gains

We believe that investors should never be in a position where they need to liquidate depleted investments due to a temporary market downturn. This is difficult to do if an investor is not preparing for the downturns before they happen. With the Perennial Income Model™, we proactively attempt to protect our clients from selling investments at a loss. This is done by following a rigid, goal-centric, approach to harvesting investment gains once the goal of an investment has been reached. Harvesting is the process of transferring aggressive investments to more conservative investments as goals are achieved.

Navigating retirement with a plan that establishes investment goals and appropriately harvests gains can bring order, discipline, peace of mind, and added security to the retiree.

Maintain Flexibility

If you have the flexibility, you can wait out market downturns and wait for good investment opportunities. The best way to add flexibility, and tip the investment odds in your favor, is by increasing your time horizon. The longer you are invested, the better opportunity you have to endure a range of market turbulence. This endurance flexibility lets you stick around long enough to let the odds of benefiting from a positive outcome fall in your favor.

Additionally, flexibility within an investment portfolio allows Peterson Wealth Advisors to select only positive-performing investments within a portfolio to be drawn upon for income. This allows investments within that same portfolio, that may have temporarily dropped in value, to rebound.

Flexibility gives you room for error. Giving yourself a margin of error is the only way to safely navigate the world of investing. The world of investing is governed by probabilities, not certainties.

Create a Plan that has Conservative Projections

In other words,  plan for the worst and hope for the best. As the creators of the Perennial Income Model™ we project retirement income streams over decades. This process is unique to our firm. We have concluded that it is in everybody’s best interest to project low. We assume future investment returns 30% less than historical averages in all of our planning and projections. If an acceptable retirement income stream can be created from the conservative assumptions that we use, an actual income stream that spins off more income than originally projected will certainly be welcomed.


Market turbulence has and will continue to afflict investors with regularity. This is why we choose to create retirement income streams. We follow the goal-based, time-segmented processes of the Perennial Income Model.

A retirement income plan is only successful if it can survive reality. A future filled with unknowns is everybody’s reality. That is why we feel it is important that retirees understand and embrace volatility, follow a goal-based plan to protect investment gains, maintain investment flexibility, and use conservative estimates as retirement income streams are projected. If retirees understand and embrace these points, they will be prepared to answer the question, “what is my plan when things temporarily aren’t going according to plan?”

Schedule a free introductory meeting with an advisor.

Investing Tips for Retirees: Risk vs Volatility

Since 2009, investors have been well rewarded for owning equities. One surprising characteristic of this bull market had been the low volatility many investors have experienced. With this return of volatility to the market, a discussion of what volatility means to you as an investor seems warranted.

Volatility vs. risk in the stock market

The price investors pay to achieve inflation-beating returns is volatility. The history of the stock market has demonstrated a lot of volatility and we don’t see that changing anytime soon. Most investors think that volatility and risk are the same thing which is not the case. Properly understood, ‘volatility’ is merely a synonym for unpredictability. The word volatility has neither negative nor positive connotations. Let me share with you an example that might help you to distinguish between volatility and risk:

What is volatility?

My family’s favorite vacation destination is Lake Powell. We own a houseboat that we share with several other families. I have learned through experience that the most important safety precaution I must attend to at Lake Powell is the proper anchoring of our boat. I will sometimes have our boat tethered to four or five anchors at a time. Why? The Lake Powell area regularly experiences sudden and powerful thunderstorms. These storms come complete with white caps, driving rain, and microburst winds that are capable of sinking both large and small boats. Many inexperienced boaters have sunk boats because they were not prepared, they were not properly anchored, or they panicked in a temporarily volatile situation and let their emotions rather than sound judgment rule the day.

While the storms are volatile and scary, they last but a short time. If a boater is properly anchored, they will be safe. If a boater is prepared for the volatile storms, there is no damage to life or property.

Financial storms, such as stock market downturns, are likewise frightening but they too last but a short time. The experienced, anchored investor is prepared for the frequent, volatile gyrations equities give us. The unprepared and emotionally driven investor turns a temporary volatile financial storm into a permanent loss by panicking and selling equities at a loss. Remember, volatility itself does not lead to losses in the equities market. Rather, it’s the emotional reaction to volatility that ultimately leads investors to lose money in the stock market. In the world of investing, the anchor is having a plan. Having a plan to follow in times of market turmoil reinforces discipline and self-control to the prepared investor.

So now that we know what risk isn’t, let’s answer the question, ‘what is risk’?

What is risk?

Financially speaking, risk is the loss of purchasing power. Sometimes purchasing power is lost in dramatic fashion like when a business fails. Other times, the erosion of purchasing power is so gradual that the loss of purchasing power is imperceptible, such as in the case of inflation.

Every asset class is susceptible to its unique set of risks. Bonds are victims to interest rates, default, and inflation risks. Real estate has liquidity and market risks. Equities and commodities likewise have market risks to deal with. Fixed annuities and bank deposits are subject to inflation risks. All of these risks can erode purchasing power.

Many investors tend to either ignore the risks of their situation, or they don’t understand the risks that have the greatest potential to inflict damage. When I think of risks, I think of my personal phobia of sharks. I can’t think of anything more frightening than being attacked by a shark. My fear is shared by millions. In fact, there are many people who are so afraid of sharks they refuse to even get into the ocean.

I have done research on the frequency of shark attacks, and surprisingly discovered that of the more than seven billion people that populate the planet, on average, only ten people per year die from shark attacks. Ten. That means I have only a one in 728 million chance of dying from a shark attack. I would say my chances are pretty good that I won’t be dying of a shark attack any time soon. On the other hand, 66,000 people die from skin cancer each year. That means I have a one in 110,000 chance of dying from skin cancer. I am 6,600 times more likely to die from skin cancer than a shark attack!

It appears that, when I go to the beach, my fellow shark phobics and I are worrying about the wrong kind of risk. It’s not the dramatic, sudden shark attack that will kill us; it’s being exposed to the sun that is more likely to do us in. So, it is with investments.

The dramatic but temporary declines in the stock market, though scary, don’t do near as much damage as does the day-to-day loss of purchasing power caused by inflation. That is why it’s important to understand all the risks in your own situation and do what you can to minimize them.

The understanding that volatility is not risk and that risk is the loss of purchasing power is fundamental to becoming a good investor.

We chose to manage money for retirees because a lifetime of investment experience has usually taught these seasoned investors the difference between risk and volatility and the importance of preserving purchasing power. When you really drill down, you will find that investment decisions driven by emotion are at the core of almost all investment losses. Having a core knowledge, of what risk is and what it is not, goes a long way towards helping the investor through the inevitable ups and downs of the stock market that will be imposed on us with regularity.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

Equities are too Risky and Should be Avoided: Grand Illusion #4

It happens all too often. The office receives a phone call or an email from a nervous investor who has been surfing the internet or watching their favorite news network. They’ve come across an article, a headline, or an advertisement proclaiming that the stock market is poised to drop by some cataclysmic amount. Further, the advertisement promotes the idea that the stock market is a high-stakes gamble, a roll of the dice, and is certainly rigged against the “Little Guy.” We are told by these frightened investors that these warnings must be credible. “After all, they are advertised on Fox News,” and these warnings “are all over the internet!” It’s an amazing phenomenon to watch the power of the media as it turns otherwise rational people into devout believers that the apocalypse is on our very doorstep.

The promoters of this brand of financial pornography are especially troubling. They prey on the uninformed and the most anxious investors of our society. They dupe the very investors that probably have the greatest need to own inflation-beating investments. Scaring the already apprehensive investor into purchasing high-commission products that will “keep their money safe” from stock market corrections is their modus operandi. Certainly, their articles, advertisements, and headlines are provocative. They are masters in the art of deception as their message distorts reality and is damaging to those who fall under its influence.

Volatility vs. risk

Anybody who understands investing knows that, in the long run, the only way you will be able to maintain the purchasing power of your money is to become a partial owner in a collection of the most profitable companies the world has ever known. In other words, you must own equities if beating inflation is your objective. The price the investor pays for superior, inflation-beating returns is short-term volatility. The stock market has been and always will be volatile. Those who are deceived by the grand illusion that equities are too risky and must be avoided fail to discern the difference between volatility and risk. Few people can make this distinction, but that is precisely the reason why few investors prosper.

Volatility is the advent of a temporary decline, while risk refers to the chance of a permanent loss. Properly understood, “volatility” is merely a synonym for unpredictability: it has neither negative nor positive connotations. It is worthwhile to take a minute and review the volatile history of the stock market as measured by the S&P 500 or large company stocks.

The Bear Market

Remember, a bear market is a drop of about 20% in value from the market’s previous high. This phenomenon is not something that is unusual or unique, bear markets are as common as dirt. As you can see from the chart below, in the seventy-three years since World War II, there have been 13 bear markets. They come around about every five years on average. These declines vary in their severity, frequency, and duration, but on average, the stock market retreats a little over 30% in a bear market. They last on average about 15 months, then the stock market rebounds and moves on to new highs. Given the very real possibility that your retirement could last two or three decades, you’ll be a participant in five or six bear markets during your retirement, so you might as well get used to them.

The Bear Market

The biggest issue with bear markets is fear. Not fear of what the stock market is doing, but fear of what the investor is doing. Peter Lynch, the fund manager for the highly successful Fidelity Magellan Fund throughout the nineties, said, “The key to investing in stocks is not to get scared out of them.” You must not abandon equities when they are down because as sure as bear markets are to come, bull markets will surely follow.

The Bull Market

Included below is a chart that shows all the bull markets since World War II. As you can see, most investors are missing the point. Instead of worrying about avoiding the next -30% bear market, we should focus our attention on making sure we participate in the next 300% bull market!

The Bull Market

As mentioned in our blog on market timing, it is an exercise in futility to try to guess when to be in or out of the markets. The key is to be disciplined and to stay invested. Since 1945, or the end of World War II, the S&P 500 has averaged an annualized rate of 11% including dividends. Another way of looking at this, if you could have invested $1,000 in the S&P 500 in 1945, that $1,000 would have grown to more than $1,800,000 today. A handsome reward for staying invested.

The Masters of Misinformation

Instead of teaching the public the virtues of investment discipline and sharing a historical perspective of investing in equities, the purveyors of this grand illusion that the equity markets are dangerous and should be avoided design advertising campaigns to reinforce the irrational fears of the financially ignorant. They fail to provide a historical perspective that a diversified portfolio of U.S. stocks has never gone down without fully recovering within a relatively short period of time. Never. Nor do they reveal that in a diversified portfolio of stocks, such as the S&P 500, the only way to lose money is to sell when the stock market is down. Not so coincidentally, this is exactly what they suggest you do to free up the cash to buy their “safe” products. The promoters of these sleazy enterprises profit only when you panic. They win only when you choose to lose.

So, who are the promoters that benefit from this grand illusion? The answer is simple. Any entity that benefits from frightening people out of equities is a co-conspirator. The companies that profit when you panic are predominantly the sellers of precious metals and annuities with the financial media assisting as a loyal partner in crime. For as they say in the news business, “If it bleeds, it leads.” Frightening, sensational, and exaggerated headlines and stories touting the demise of the stock market are the tools they employ to promote their ratings and sell their products.

In an accompanying blog, we look at the world’s worst investments. It may come as no surprise that in our estimation, the world’s worst investments are precious metals and index annuities. These historical underachievers are bought only by the fearful and ignorant. These products have horrible performance histories and are purchased only because, as Jeremy Siegel was quoted to have said, “fear has a greater impact on human action than does the impressive weight of historical evidence”. Unfortunately, experience has taught us that Mr. Siegel’s quote is entirely accurate.

Peter Lynch said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Think about this. Some investors are more than willing to systematically watch their purchasing power erode, because they are afraid of the pain associated with a temporary stock market correction. They are willing to pay unbelievably high fees to insurance companies that sell annuities with the promise to protect their money should the stock market crash. Some investors willingly throw money at the poorest of investments and subject their money to the promises of the shadiest of characters before they allow their money to be exposed to the temporary fluctuation in price of a share of the most profitable companies the world has ever known. The fearful investors are so focused on missing the next bear market that they willingly skip out on one of the most profitable investment opportunities ever made available to mankind: investing in equities.

Certainly, there will be temporary periods of pain and discomfort from investing into equities, but the pain of owning a well-diversified portfolio of equities has always proven to be temporary, and the long-term results have always been able to protect purchasing power.

Investing is more of an emotional exercise than it is intellectual. Those who can harness their emotions during volatile times, and not fall prey to the peddlers of doom, will be successful. Those who lack the emotional maturity to be a disciplined investor will forever struggle. The antidote to fear and panic is having a plan. Every investor needs to have an investment goal in mind when investing and then they need to create an investment portfolio that matches their future income needs. Without a goal-driven plan, emotions drive our investment decisions and emotionally charged investing will never produce a good investment outcome.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!


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Welcome to the Grand Illusions

Grand Illusion #1: Market Timing

Grand Illusion #2: Superior Investment Selection

Grand Illusion #3: The Persistence of Performance

Past performance does not guarantee future results – Grand Illusion #3

“If past history is all there was to the (investment) game, the richest people in the world would be librarians.” -Warren Buffett

If you have ever bought shares of stock, a bond, or shares in a mutual fund, you were presented with the following disclaimer: “Past performance does not guarantee future results.” The U.S. Securities and Exchange Commission requires it and the SEC is right, there truly is no correlation between an individual investment’s past performance and its future. Past performance has no predictive power whatsoever.

Of course, that doesn’t mean your investment advisor sat you down, rested a hand on your shoulder, and with a kind but concerned look in their eye, uttered these words. No, it was in the fine print somewhere that most of us never bothered to read. Or worse, when we came across this disclaimer, we ignored it, because frankly, we did not want to accept it. We like guarantees. When we buy an investment, we simply want the assurance that it will perform as it has done in the past. Unfortunately, that promise can’t honestly be given.

The “grand illusion” of persistence of performance is hard to diffuse because so much of our life experience is based on the reliability of past performance. We believe the sun will come up tomorrow morning at the appropriate time, because it always has. We therefore assume that it always will. Your summer vacation at the beach, or next winter’s ski getaway, can be planned months in advance because of the persistence of performance of the weather, and the reliability of the change of the seasons. If you have a car that has averaged seventeen miles per gallon since you purchased it four years ago, it would be crazy to assume it will average anything but seventeen miles per gallon next month.

The persistence of performance surrounds us, and it seems quite natural to want to use past performance as a criterion to select our investments. Unfortunately, there is no evidence that the past performance of a specific investment has any predictive power of that investment’s future.

S&P Persistence Scorecard

S&P Global, an independent research company that monitors the mutual fund industry, produces a biannual report they call the “S&P Persistence Scorecard.” These annual reports, always come to the same conclusion: that over a five-year period, less than 1% of the mutual funds in the top quartile at the beginning of a five-year period have been able to maintain their top quartile status at the end of five years.

Many investors waste an inordinate amount of time and energy studying past investment returns, attempting to discover next year’s investment champions. It is an exercise of futility, but it is easy to get caught up in, because we really want this illusion to be true. Founder of Peterson Wealth Advisors, Scott Peterson recounts an experience of when he was first beginning in the investment business:

“I cut my teeth in the investment business in the late eighties and early nineties, back in the day when double-digit investment returns were the investment norm. It seemed as if the whole world was consumed with finding the hottest-performing mutual fund. As a young and inexperienced advisor, I spent countless hours identifying all the top-performing funds so I could direct my clients to them. I now recognize that perfecting my golf swing or cleaning my garage would have yielded equally productive investment results.”

So, who profits from promoting the idea of persistence of performance?

Any entity that touts their ability to direct you to a superior investment, based on that investment’s past performance, perpetrates this grand illusion. The Morningstar, Inc. star-rating system for investments is based on past performance, rendering their system meaningless. That is right: buying a five-star fund versus a one-star fund does not increase your chance of success! Countless newsletters and magazines are sold as they flaunt their recommended lists of the hottest stock or best mutual funds to buy. All their recommendations are based on historical performances which has no predictive power.

Just as the road in front of us is different from the road behind us, it is important to recognize that drivers as well as investors who navigate solely by what they can see in their rear-view mirror are not well equipped to manage the inevitable twists and turns of the road that lies ahead.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!


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Grand Illusion #4: Equities are Risky and Should be Avoided

Do actively managed portfolios beat the market? – Grand Illusion #2

The fallacy that the stock market can regularly and consistently be outperformed by superior investment selection is the ugly stepsister to the first ‘grand illusion’ of investments, market timing. The notion that through an extensive search of the stock market or the mutual fund industry, investors can reliably uncover the next investment superstar is categorically false.

You might think, “If I could only find and buy the next Apple, Google, or Amazon stock in its infancy, I would be rich.” Well, you would be rich, but it is unlikely you will be that lucky. There are thousands of mutual fund managers and pension plan managers, and a wide variety of other highly educated, experienced professionals in the investment industry scouring the investment universe in search of the next investment superstar. The full-time professionals, with their vast resources, can rarely find a hidden investment gem or concoct a superior portfolio of investments, that can reliably beat their corresponding index (or the average).

We like to think that trying to get rich through individual investment selection, versus owning a diversified portfolio of equities, is like betting on a single football team that will win next year’s Super Bowl, versus having a partial ownership in the National Football League (NFL) itself. Owning a share of the entire NFL would entitle you to a proportional share of all the profits from the entire organization and from every team. Certainly, teams within the organization will experiences their ups and downs each year, but overall, the NFL as an entity makes a lot of money (and half of its teams are guaranteed to have losing seasons). A rational investor would not bet on a single team instead of owning a piece of the whole organization. Rational investors recognize that the odds are not in favor of those who try to beat the markets through superior investment selection.

Successful long-term stock and mutual-fund pickers are hard to find. There are no market timers or stock pickers listed among Fortune magazine’s richest people in the world. Wouldn’t you think that if market timers and stock pickers could really do what they claim to be able to do, they would be numbered among the world’s wealthiest individuals? So, where are they?

Does Warren Buffet beat the market?

Some would argue that the oft quoted billionaire Warren Buffett would qualify as a successful stock picker. He is a unique and talented investment manager and has made excellent individual investment choices. But Warren Buffett’s successes can be attributed to his extreme discipline and patience rather than flipping stocks or timing markets. It is interesting to note the instructions he gives to the trustee of his own estate regarding how his wife’s money is to be managed upon his demise: “the trustee is to put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” When the third wealthiest person on the planet, who made his wealth by managing investments, instructs his trustees to not even attempt to “beat the market” we should pay attention.

An additional illustration of Mr. Buffett’s belief in the passive investing process is demonstrated in an interesting wager that he made in 2007 with Ted Seides of Protégé Partners. Protégé Partners is a New York-based money-management company that prides itself in its ability to time the markets and outperform the stock market through superior investment selection. The bet was, that for a ten-year period, Protégé Partners would choose a combination of “timing and selecting” types of investments to beat Warren Buffett’s choice of a mutual fund that mimicked the S&P 500. At the end of the ten years, the winner’s favorite charity would receive one million dollars.

When the wager was completed in 2017, Buffett’s S&P 500 index fund returned 7.1% compounded annually. Protégé Partners competing hedge funds returned an average of 2.2%. Surely Buffett’s charity, Girls Inc. of Omaha, was excited to open their mail box after the wager was completed.

There is a lesson to be learned from this wager. Warren Buffett, one of the smartest investors on earth, believes in the value of passive investing. He believes very few investors “can beat the market” and he trusts that investing into the average through index mimicking equities will ultimately beat out those who seek above average investment results through superior stock and mutual fund selecting.

Who benefits from actively managed portfolios?

So, if market timing and superior investment selection has been proven to be unproductive, who benefits from these deficient strategies? Mutual fund companies, brokerage firms, and any entity or individual whose value proposition is their ability to tell you what tomorrow’s star investment will be. Especially egregious profiteers in this illusion are the magazines that provide lists of “the best mutual funds for the year” and the television programs instructing the public on what stocks to buy and sell as part of some inept day-trading strategy.

There is an inordinate amount of time, energy, and money that is wasted on the possibility that market timing and superior investment selection may contribute to investment performance. The academic world refutes the claims that market timing and superior investment selection have any significant impact on actual investment results. In practice, the additional costs (increased management costs and higher trading costs) incurred by those who willingly pay for these tactics far outweigh any possible benefit they might offer.

Many naïve investors believe that if they spend an hour or two every other month checking out stocks, or mutual funds, on the internet, that they will be able to create an investment mix that will outperform market averages. When long term, index beating, investment selection can’t be accomplished by the most experienced professionals, it is doubtful that the amateur on an occasional cruise through cyberspace will be successful.

Certainly, there is a lot of money being made by the deception of superior investment selection. Unfortunately, we once again see that everybody, but the investor is making that money.

So, when it comes to investing your own portfolio we would suggest that you follow the sage advice of Vanguard Mutual Funds founder Jack Bogle, “Don’t struggle to find the needle in the haystack. Just buy the haystack.”

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

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Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided

The myth of “Timing the Market” – Grand Illusion #1

The first “grand illusion” of investments is market timing. Market timing presupposes that those who are smart enough, or follow the markets closely enough, can figure out both when to get into the stock market and when to get out. The goal is to miss the pain and experience the gain.

Of course, we would all love to own equities and enjoy the profits while avoiding downturns, but unfortunately, it cannot be done. The difficulty in market timing is that you not only have to know when to get out, but also when to get back in. Therefore, you must guess correctly not only once, but twice for market timing to actually work.

What we have found is that there are a lot of people and products willing to take money from the public who attempt to time the market, but none have a proven track record to substantiate their claims. Of course, there is the occasional “investment guru” that may guess the temporary movement of the market. When that happens, they have their face on the cover of the financial magazines and show up on the financial radio and television shows, but they are soon forgotten. Why? Because successful market timers must guess correctly twice: when to get out, and when to get back in. That cannot reliably be done.

We often run into individual investors that report to us they saw the financial crisis of 2008-09 coming, and they were able to avoid the big downturn in the stock market. As we investigate their claim in more detail we find that these investors, that take such pride in their investment prowess, usually still have their money sitting in the bank account that they moved their money to during the great recession.  Therefore, even if they did miss the 56% downturn of 2008-09 they also missed out on more than 300% upturn since 2008-09. Again, you must guess correctly twice.

Can you really outperform the stock market average?

The S&P 500 is a representative basket of the 500 largest corporations in the United States: Apple, ExxonMobil, Proctor & Gamble, etc.

An index is a tool that gives us a way to measure how the overall stock market is faring. There is no management of the portfolio of stocks that make up the S&P 500, and you can’t buy into the S&P 500 itself. You can, however, purchase exchange-traded funds (ETFs) and mutual funds that mimic the holdings of the S&P 500. When you buy an investment product that mimics the S&P 500, you become a partial owner of all 500 corporations that compose the S&P 500. You are buying a piece of the entire basket of stocks.

Actively managed portfolios

The alternative to passively investing into an index fund is to attempt to make money by investing into actively managed portfolios. Actively managed investment portfolios are those that attempt to outperform an index, such as the S&P 500, through market timing and superior investment selection. It is interesting to note that in a given year roughly 15% of actively managed mutual funds that invest into large U.S. stocks can outperform the S&P 500.

You may be thinking that you only need to do the research and find the 15% of mutual funds that beat the S&P 500. That is a great idea, but it’s just not that simple. It’s never the same funds that beat the S&P 500 year after year. Every year there will be a different group of mutual funds that outperform. You would have to determine in advance which 15% of mutual funds would be next year’s winners. Therein lies the challenge. Good luck.

Over longer time periods, the percentage of actively managed mutual funds that can outperform the index diminishes dramatically. The obvious question that needs to be asked, therefore, is, “Why don’t I just buy the average?”

Well, why don’t you?

The good news is that you don’t need to “beat the market” to be a successful investor, you only need to get the market’s average and participate in its earnings. Because when it comes to investing, getting the average return of the entire market puts you near the top of the class.

The profiteers of market timing

So, who stands to profit from the illusion of market timing?

First, the mutual fund industry in general. The fees for actively managed mutual funds are more than ten times higher than buying a fund that mirrors an index. The average cost of actively managed large-cap stock funds is 2.33% when expense ratios and transaction costs are considered. The average cost to buy a fund that tracks the performance of the S&P 500 itself is .20% when transaction costs and expense ratios are considered. Even though index funds outperform actively manage mutual funds and are cheaper to buy, for the obvious financial benefits, mutual fund companies promote their more expensive, worse-performing funds instead.

The second group of profiteers of this particular grand illusion is any other person or entity that promotes the idea that they know what the market’s next move will be. The large brokerage firms and the small investment advisors, whose value propositions are their knowledge of the future, are co-conspirators of this illusion.

Magazines, newsletters, and cable news stations that predict the future of the markets, the price of oil, the next recession, or any other future price or event, likewise share in this “grand illusion”.

The following that some of these prognosticators have is amazing. On the air, these self-assured individuals are incredibly convincing. But being convincing doesn’t mean they are accurate. Few investors take time to investigate the track record of those that can “see into the future”. If you were to Google the accuracy rate of their past predictions, you would know better than to follow their forecasts.

Some of the most entertaining promoters of the illusion are the authors of books that have figured out when the “financial apocalypse” will begin. For $34.99, they will share this dark secret with us, and instruct us on how we can thrive while the entire economy collapses, dollars become worthless, and our neighbors starve to death in the streets.

The next time you are in the bookstore, check out the books on investing. You will find a book authored by Harry Dent in 1999. His book, ‘The Roaring 2000s’, predicted that the Dow Jones Industrial Average would surge to 35,000 by the end of the next decade. That never happened. Instead, the first ten years of this century ended up being the worst decade for investing since the Great Depression. The Dow Jones Industrial Average closed the decade lower than where it began, an entire decade with no growth.

Instead of taking a breather after this forecasting disaster, in 2009, Mr. Dent doubled down on his forecasting and wrote a new book, ‘The Great Crash Ahead’. Since this book hit the shelves, the S&P 500 has tripled in value.

It seems like this forecaster just can’t get things right. I wouldn’t be so disparaging about this author if it were not for the fact that he is one of the most quoted “experts” in the financial industry. Every year for the past several years, he has predicted that the Dow Jones Industrial Average will drop by 6,000 points. It hasn’t happened, but that’s not the point. The point is that every time he makes this dire prediction, he sells a lot of books.

The grand illusion of market timing is reminiscent of the California gold rush. In 1849, fortune seekers from across the globe flocked to California in hopes of striking it rich. Fortunes were made, but it was not the hard-working prospectors that become wealthy. Rather, it was the shop keepers, suppliers, and bankers who were the real profiteers. Similarly, fortunes are now being made by market timing. Unfortunately, it is not the investor that will be bringing home the profits. It is the mutual fund industry, brokerage firms, and the financial media that are the real winners.

With the illusion of market timing, everybody makes money but the investor.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!


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Grand Illusion #2: Superior Investment Selection
Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided

Investment myths: Welcome to the Grand Illusions

As investment advisors, as well as ones who have extensively researched investment-related topics over the past thirty years, we have come to a disappointing conclusion: the ideas embraced and promoted by many in the investment industry and the media are not shared by the facts that are revealed in the academic world.

The next few blog posts will be dedicated to debunking the investment fallacies of our day such as market timingsuperior investment selectionthe persistence of performance, and avoiding equities by exposing where academic research and conventional wisdom collide. After all, we really can’t proceed with a constructive discussion about the management of investments during retirement without first dispatching false investment narratives.

So, why is there a chasm between academia and the messages shared by the conventional investment pundits of the day? The simple answer is that for some, profits trump giving quality investment information.

It is also important to remember that financial institutions were created to make profits for themselves and their shareholders, not their customers. These entities as well as the financial media are in the business of selling products and making profits. Giving useful, common-sense, factual investment advice is not their primary objective – selling a product and making money is.

Unfortunately, the tried-and-true facts resulting from academic research are valuable but usually boring. Fictional concepts, no matter how useless and sometimes damaging they may be, certainly have more sizzle, and sizzle sells products. The financial media, whether it is newspapers, magazines, radio or television, must “sell” you the news instead of giving you the facts. The financial news outlets would go out of business if they headlined the simple truths of investing such as “Patience and Discipline, the Keys to Success,” or “Slow and Steady Wins the Race.” To survive, they must continually come up with new and exciting headlines to grab your attention with headlines like, “Six Hot Funds to Buy Now!” or “Wall Street’s Secrets Revealed!” These headlines are catchy, and surely generate a lot of money for their companies, but this type of information does not help the investor.

We don’t begrudge corporations trying to make a profit in the most capitalistic industry on earth. Certainly, there are reputable financial companies that have valuable products and services we can benefit from.

Unfortunately, some companies and individuals fill the airways and printed media with half-truths and even outright lies as they attempt to get us to purchase their products and services. Just as pornography is harmful to all that get caught in its snare, this financial pornography likewise has no redeeming value, gives the investor a false sense of reality, and will devastate the financial future of any that allow themselves to be seduced by it.

As we were searching for a name to call these investment falsehoods, a song that that is often played on our classic rock radio station came to mind. The lyrics to the old Styx hit, “Grand Illusion,” accurately describes the deceptions of our day. So, welcome to the grand illusions of investing.

If you are getting close to retirement and will have at least $1,000,000 saved at retirement, click here to request a complimentary copy of Scott’s new book!

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Grand Illusion #1: Market Timing
Grand Illusion #2: Superior Investment Selection
Grand Illusion #3: The Persistence of Performance
Grand Illusion #4: Equities are too Risky and Should be Avoided

Investing Lessons Learned from 2020

Once in a very great while, there comes a year in the economy and the markets that serves as a tutorial—in effect, an advanced class in the principles of successful long-term, goal-focused investing. 2020 was such a year.

On December 31, 2019, the Standard & Poor’s 500-Stock Index closed at 3,230.78. On New Year’s Eve 2021, it closed at 3,756.07 —15.76% higher. With reinvested dividends, the total return of the S&P 500 was 17.88% From these bare facts, you might infer that the equity market in 2020 had quite a good year, indeed it did. What should be so phenomenally instructive to the long-term investor is the journey the market took to get there.

The stock market peaked on February 19 of last year then reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August. The lifetime lessons that were once again on display were that the economy can’t be forecasted, and the stock market cannot be timed. Instead, having a long-term plan and sticking to it, acting as opposed to reacting—which is our investment policy in a nutshell—once again demonstrated its enduring value.

Two corollary lessons are worth noting in this regard: (1) The velocity and trajectory of the equity market recovery essentially mirrored the ferocity of the February/March decline. (2) The market went into new high ground in midsummer, even as the pandemic and its economic devastations were still raging. Both occurrences were consistent with historical norms. ‘Waiting for the pullback’ once a market recovery gets under way, and/or ‘waiting for the economic picture to clear before investing’, turned out to be formulas for significant underperformance as is most often the case.

The American economy—and its leading companies—continued to demonstrate their fundamental resilience through the balance of the year, in that all three major stock indexes made multiple new highs. Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution mode as the year ended. There is the expectation that the most vulnerable segments of the population could get the vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of the year, if not sooner.

An additional important lifetime lesson, of this hugely educational year, had to do with the presidential election cycle. To say that it was the most hyper-partisan election in living memory wouldn’t adequately express it. Adherents to both candidates were genuinely convinced that the other would, if elected/reelected, precipitate the end of American democracy. Everyone who exited the market in anticipation of the election got thoroughly, and almost immediately, skunked. They experienced the same awful result as those that sidelined their money during the 2016 election. The enduring historical lesson: never get your politics mixed up with your investment policy.

Still, as we look ahead, there remains plenty of uncertainty to go around. So, how do you and I—as long-term, goal-focused investors—make investment policy out of that possibility? Our answer: we don’t, because one can’t. Our strategy is entirely driven by the same steadfast principles as it was during the pandemic—and will be a year from now. Equities, with their potential for long-term growth of capital and their long-term growth of dividends have been, and will continue to be, the only logical way to invest your money to stay ahead of inflation. This was the most effective approach to the vicissitudes of 2020, and we believe it always will be.

In my 35 years of investing experience, I have noticed that every failed investor reacts to news headlines and current events while every successful investor follows a plan. We will therefore continue to tune out ’volatility’, and we will continue to act and not react. We will follow the time-tested plan, the Perennial Income Model, that has served you so successfully in the past. We look forward to discussing your plan further with you as we meet this year. Until then, we thank you again for entrusting us with your future. It is a responsibility that we do not take lightly, and we consider it a privilege to serve you.

Strategic Opportunities in a Market Decline

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill

As I watch the emotional reaction of investors during market turbulence, I concur with Churchill as I see individual investors categorize themselves into two separate camps. They are either victims or they are opportunists.

Beyond reminding the self-prescribed investment victim of the overwhelming historical evidence of the resiliency of the stock market, there is little that can be done to save them from themselves as they panic and sell as markets decline. Therefore, let’s not waste our time discussing how to rescue the lemmings as they throw themselves off a cliff

Let us focus instead on the positive steps that can be taken by an investment opportunist when stock markets retreat. There is so much that can and should be done in every financial crisis. The prepared opportunist can turn today’s temporary stock market lemon into tomorrow’s lemonade.

An investment opportunist recognizes that every downturn is temporary, every bear market is eventually followed by a bull market, and that the stock market will eventually go on to reach new record highs. There has never been an exception to this pattern, only the timing and duration of the bear and bull markets is uncertain.

Six ways to take advantage of a temporary market downturn:

1. Roth IRA Conversion

A traditional IRA will someday be taxed while a Roth IRA grows tax-free. Therefore, Roth IRAs are more advantageous to own than traditional IRAs. You can convert a traditional IRA to a Roth IRA, but you must pay income tax on the entire amount of the traditional IRA that you convert. So, let’s say you own 10,000 shares of ABC stock that are priced at $10 per share. The value of your investment is therefore $100,000. If you were to convert these 10,000 shares at the $10 price you would need to pay income tax on the $100,000 converted to a Roth IRA.

In a down market, an opportunist would realize that his ABC stock is now only worth $7 per share. If he were to convert all 10,000 of his shares that are now worth only $70,000, he would only have to pay tax on the $70,000 Roth conversion, not the full $100,000. When the price of ABC stock rebounds to $10 per share our optimists would have $100,000 worth of Roth IRA value but they would have paid tax on $70,000 worth of Roth IRA conversions.

2. Refinance Your Mortgage

When the stock market recedes, it is common for the Federal Government to step in and attempt to jump-start the economy. They do this is by reducing interest rates. This move will often temporarily reduce mortgage interest rates. The opportunist would jump at the chance to refinance their mortgage because a thirty-year, $300,000 mortgage with a 3.5% interest rate costs $60,000 less over thirty years than the same mortgage with a 4.5% interest rate.

3. Fund IRA/Increase 401(k) Contributions

An easy way to take advantage of a temporary market downturn is to contribute additional funds to retirement accounts. We have all heard the maxim, “buy low, sell high”. Well, then buy when equities are selling at a discount.

Some of you will remember the years 2000-2009 which was the worst decade for investing since the great depression. Large stocks ended the decade at the same levels that they began the decade. That’s right, ten years with zero growth. The pessimist would say, “I am glad, or I wished, that I missed out on that disaster”. Meanwhile, for the opportunist, this decade was a wonderful investment opportunity! As markets went down the opportunist systematically purchased depleted equities in their 401(k)s and IRAs at a substantial discount. These once depleted shares are now worth 400% of their 2009 value and that’s taking into consideration the latest downturn.

Those who make annual contributions to retirement accounts should contribute when markets plummet. Those who systematically contribute to 401(k)s should consider reallocating conservative investments within their 401(k)s to equities and/or increasing their 401(k) contribution rates.

4. Rebalance Your Portfolio

There is proven value and additional security when investors diversify their investments. Few would argue that diversifying or creating the proper mix of investments to accomplish specific goals is important. The challenge is keeping portfolios diversified. As markets fluctuate, portfolios get out of alignment as top-performing investments become a bigger allocation and underperforming investments shrink to a lesser allocation of the original portfolio mix. Rebalancing brings the investments back to the original mix. The process of rebalancing requires buying and selling securities which ofttimes create unwanted taxable gains. Rebalancing can be accomplished during market downturns with greater tax efficiency because the capital gains incurred are less as depleted equities are sold.

If it so happens that your rebalancing requires purchasing equities to bring your portfolio back to its original composition, then rebalancing adds additional value as temporarily beaten up equities are purchased at discounts.

5. Tax Loss Harvesting

Let’s say that Clara bought a mutual fund three months ago for $100,000. Because of the recent slide in equities, this investment is now only worth $80,000. Clara could simply hold on to that investment and wait for it to rebound to $100,000. There would not be any tax benefits or consequences by waiting for the depleted shares to rebound.

However, Clara is an opportunist and hates paying income taxes. She decides to sell the diminished investment and create a $20,000 capital loss which would benefit her taxwise. She then invests the $80,000 into a very similar investment to that which she sold and when the market rebounds she would still have the $100,000 of value plus a $20,000 capital loss that could save her several thousand dollars in income taxes.

6. Invest Excess Cash

The most important criteria to consider when deciding how to invest is time horizon, or how long money can be invested until it is needed. Money that will be required in the next five years for a purchase or for income should not be invested in equities because of the short-term volatility that accompanies the stock market. Money needed between five to ten years should be moderately invested into a mix of equities and fixed-income investments. Money that will not be needed for ten years and beyond should be invested in equities to help fight inflation. Market corrections provide opportunities to reassess portfolios and put money that is on the sidelines to work.

A Concluding Thought

The richest men in the world, from every generation, did not get that way by betting against the ingenuity and indomitable spirit of the human race to create a better life for itself. Successful investors have always been richly rewarded for their willingness to invest in the future. This generation is no exception. Today’s optimists, or those willing to invest a better tomorrow, are thriving.