Get Back to Zero: Not Enough

 

Getting your investments back to where they were before the bear market – in effect, back to zero – is not sufficient. Inflation has, in the meantime, made the prices of day-to-day goods and services more expensive.

You continually hear: “Today’s markets are as uncertain as ever.” Well, duh! Google key words like “markets” and “uncertain,” and you will see hundreds of references telling you what you already know – the future largely is unknowable and risks abound.

All you really know about the future is that you will live in it. Everything else is a variable, including how long you will live, the cost of living and investment returns. For those pondering retirement, healthcare concerns increase the anxiety factor. For parents with children to educate, increasing tuition costs pose a challenge. Hard work and a rising income may push you into a higher tax bracket, as fiscal cliff taxes and the Affordable Care Act levies erode take home pay.

Uncertainty breeds fear. Our reptilian brain responds to fear by fleeing the source of the perceived threat. On Oct. 9, 2007, the Standard & Poor’s 500 stock index hit a record high of 1,565. On March 9, 2009, the index closed at 676.53, the low point in that bear market cycle.

That was a grueling case of déjà vu all over again, as the two-year dot-com crash bear market of 2000-2002 repeated itself in a global credit crisis and housing crash. Given 13 years of market gyrations, investors are understandably nervousness and hesitant. As the market again closed in on the heights last seen in 2007, worries again surface. Pundits warn, “Risks are increasing.”

Recently, Bloomberg headlined, “Insider sales reach 2-year high as S&P 500 nears a record.” Do sales by these insiders – who are company executives – signal rats leaving a sinking ship? Not likely. “Prudence” may be a better descriptor.

If you are an executive in your sixties and approaching retirement, and the bulk of your net worth is tied up in your company’s stock, you might wish to diversify. Some of this selling took place in 2012 in an effort to beat rising capital gains taxes. Again, prudence reigned.

Investors who held on during a prolonged bear market tend to sell when the value of their holdings approaches or gets back to where they were at the previous high point. In other words, they are subject to what’s called the “get back to zero syndrome.”

These investors say things like: “No, I didn’t make any money on the round trip, but at least I am back to where I was.”

It has taken a half-decade to restore the lost ground from the financial crisis. On Tuesday, the Dow Jones Industrial Average finally topped the all-time high it reached in 2007. You have to build what you need for tomorrow. Average money market rates at 0.48% or a five-year certificate of deposit at 1.27% won’t cut it.

Making it worse, in the recent cycle, cost increases for items essential to wellbeing outpaced the growth of many investment options. With the potential for longer life in an inflationary economy, merely preserving what you have means retreat.

A basket of goods that cost $100 in 2007 cost $110.35 at the end of 2012. In May 2007, with regular gas at $3.07 a gallon, CNN bemoaned the impact of record gasoline prices on consumers. The national average for a gallon of regular gas on Feb. 20, 2013, was $3.77, up 23% from the 2007 “record high.” Food prices are rising. Health insurance premiums are up. Taxes are up. A worker making $50,000 per year loses $1,000 in added payroll taxes in 2013 compared to 2012.

“Getting back to zero” is not a successful strategy. So what should you do with your money? If you are accumulating savings in retirement plans or personal accounts, make the inevitable market slumps your friend by dollar-cost-averaging and buying cheaper shares when they are on sale.

Diversify into time-related investment categories with enough near-term safe money to ride through down strokes in markets. This is known as the bucket strategy, where you divided your assets into different categories, or buckets, and withdraw income from them one at a time, at different points in your retirement. The assets in the earliest withdrawal bucket are the least risky, and the ones in the latest are the most risky.

Focus on global quality in stocks. Seek income sources that can beat inflation. Understand opportunities in alternative investments. The cost of inaction is rising.

 

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Lewis Walker, CFP, is president of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) in Norcross, Ga. Securities and certain advisory services offered through The Strategic Financial Alliance Inc. (SFA).  Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with the Walker Capital Companies. 770-441-2603. lewisw@theinvestmentcoach.com.

 

Investing involves risk including the potential loss of principal. No investment strategy including diversification can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results.

 
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