As I was talking with a prospective client the other day, we’ll call him George, George said “I only need a couple more years at 12% and then I’ll be retired and life will be good.” He’s a small business owner, and a successful one at that so it really surprised me to hear this come out of his mouth. It has bothered me ever since. So often we forget what the past has taught us. In just the past 15 years we have had two major adjustments in the stock market. All of the pundits are at a loss for an explanation for the stellar performance of the market and many are expecting a major correction once again. (Don't take my word for it see what Forbes says, click here.) Yahoo Finance also states, that the real estate market is bad, and could get even worse, gold has stalled out, and yet George is still expecting 12% for a few more years. When I asked what he was basing this expectation on, he couldn’t really say, just that he’d been able to get that the last few years. Yes, he also lost 28% in 2008.
Eleanor Rosevelt said “Learn from other’s mistakes. You can’t live long enough to make them all yourself.” But as John Dewey stated “We do not learn from experience… we learn from reflecting on experience.” If we take a moment to reflect on what George’s experience has been and the mistakes he has made, and is currently making, perhaps we can learn from him, rather than having to make those same mistakes ourselves. I see 3 quick lessons we can learn from George.
 Lesson #1- Robert Kiyosaki, author of Rich Dad, Poor Dad and numerous other books and articles said “ It is easy to stay the same but it is hard to change. Most people choose to stay the same all their lives.” George is in his 60’s and near retirement and has been investing the same way all of his life. He has been snake-bit numerous times with losses but chooses still to not hedge his investments properly, leaving his entire retirement plan at risk. George may very likely be dealing with the pain of regret since he has chosen to not go through the uncomfortable process of change. |   |
Lesson #2- Warren Buffet’s number one rule of investing is “NEVER LOSE MONEY”. The reason behind this rule of one of the most successful investors of our time is two-fold. First, losses require significant returns to recover. In George’s case, though he has earned roughly 12% on his investment each of the last 3 years, he needs a 39% return just to break even and recover from his losses. If we throw this out in a mathematical equation that shows us the effects of compound interest included we see reality(we’ll simplify it a bit and just use $100,000 and show the loss year immediately followed by 3 years of 12% returns):
 | $100,000-$28,000(28%)= $72,000 after year 1 losses 28% $72,000+$8,640(12%)=$80,640 after year 2 gains of 12% $80,640 +$9,677(12%)=$90,317 after year 3 gains of 12% $90,317 +$10,838(12%)=$101,155 after year 4 gains of 12% |
So we can see that even with great returns of 12% annually for 3 consecutive years, George has just barely recovered from his real-life losses. While doing so, George also lost 4 years of potential earnings while getting 4 years closer to retirement. This illustrates clearly why Mr. Buffet feels so strongly about avoiding losses. If we were to take, instead, a conservative 5% rate of return with guaranteed protection from loss instead of a risky approach chasing the 12% rate of return, he would instead have $115,762, as you can see in the example below:
| $100,000-$0(28% loss avoided through guarantees)= $100,000 after year 1 l $100,000+$5,000(5%)=$105,000 after year 2 gains of 5% $105,000+$5,250(5%)=$110,250 after year 3 gains of 5% $110,250+$5,512(5%)=$115,762 after year 4 gains of 5% |
That’s a difference of more than $14,000 in a very short time, in a very conservative approach, just by avoiding loss (the Wharton School of Business ran this concept, called indexing, over an extended period of time and found that historically it is a very viable approach, not just for those close to retirement, but for all those who are saving for retirement). Besides, if it’s good enough for Warren Buffet, it’s probably good enough for me.
Lesson #3- Taking time to reflect on life, in all areas, is essential to improvement and true happiness. Money isn’t everything, but it can teach us a great deal in life, if we let it. As Mr. Dewey pointed out, learning comes from reflection. In George’s case, running a small business has occupied his mental energy for so long that it is now getting in the way of him taking a reflective and crisp approach to his retirement planning. What are you allowing to sap the mental energy you should be putting towards those important things in your life? George is a great man and is doing his best to juggle his various priorities. We all have to do the same, but often times we find ourselves dedicating time to Facebook, Youtube, and Netflix rather than reflecting on our relationships, work, plans, dreams, and wonderful blessings we each enjoy in our lives.
About this Author: Ed Kinsey has been in the financial services industry since 2003. He has experience in Real Estate, Mortgages, Commercial Finance, Annuities, and Life and Health Insurance. His goal is to benefit the lives of one million people. He want companies to start providing better benefits at lower costs through our services. He wants to enlighten people to the retirement benefits available through life insurance, the only tax free retirement option. We have secure solutions. Ed is also a world ranked powerlifter and fitness enthusiast.
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