HOW TO SAVE MORE DURING THE NEXT MARKET CRASH

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HOW TO SAVE MORE DURING THE NEXT MARKET CRASH

By Adam O'Dell, Chief Investment Strategist, Dent Research

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Let's face it, investors are often their own worst enemies. While the stock market has the potential to make you rich, most folks don't even match the market's return each year. In fact, some earn FAR LESS! I've witnessed this first-hand throughout my career. But you don't have to take my word alone for it. DALBAR, a leading financial research firm, did a study that shows the average annual return of a variety of assets, including stocks. According to the research, between 1986 and 2016, the S&P 500 gained an average of 10.2% per year. But the average investor earned just 3.9% per year over the same 30-year time frame. That means a $10,000 investment in the S&P 500 turned into $1,416,646, but the average investor made just $70,371. That's a $1,346,275 difference! That's like losing out on an extra $44,875 a year for 30 straight years, just because you couldn't get out of your own way. Put another way, the average investor has MISSED OUT on more than 61% of the market's return for the last 30 years. That's insane! How is it even possible? Shouldn't they earn closer to the 10.2% the market made? Well, the answer is yes... they should have, IF they were truly loyal in their commitment to longterm buy-and-hold. But that's one of the biggest problems with buy-and-hold. It requires a commitment that most investors I've met simply can't make. A commitment to be in stocks for "the long haul." Most investors simply can't keep their paws off the panic button when bear markets strike. It's easy to hold stocks when they're going up, as they do a majority of the time. It's even easy to hold stocks through a routine 5% or 10% dip. But when stocks are down 30%... 40%... 50%... even 70%... most investors crack under the pressure and give in to their gut, which is screaming, "Enough is enough! Get me outta here! Give me my money back!" The trouble is, we usually reach our rock-bottom breaking point at the worst possible moment ? only after stocks have already fallen 50% or more, and just before they begin their long road to recovery. That's why it's SO important that you stop falling for the same tricks over and over again. It helps to understand this...

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WALL STREET'S "BUY-AND-HOLD FRAUD" FINALLY EXPOSED!

If you're like most people, you've just been doing what you've been told to. That is to BUYAND-HOLD.

But that's terrible advice!

As I see it, there are three fatal flaws with Wall Street's buy-and-hold message. The first is that it's VERY believable!

To be fair to Wall Street's "buy-stocks-and-just-hold-them-forever" mantra, stocks have indeed been a powerful wealth builder for more than a century. They've earned an average 6% to 10% a year over many decades and market cycles. So, it's hard to argue with the stock market's long-term track record.

As long as you have enough time between today and retirement, you should just buy and hold... right?

It's difficult to trash an idea that seems so logical and has the numbers to back it up. And that's why so many investors, for decades, have "bought" what Wall Street sells.

Unfortunately, there's a dirty secret about buy-and-hold that almost always leads it to fail. That is, it requires that commitment most investors simply can't make.

Look at this chart below...

Maximum and minimum annual return

Minimum and Maximum Total Real Returns by Holding Period 1870s to Present

60%

53.1% 40%

20%

0%

-20% -40%

-38.0%

-60% 1

43.9%

23.5%

-28.2%

-13.5%

18.3% -4.4%

2

5

10

Years

13.0% 0.7%

20

10.2% 3.2%

30

9.2% 4.7%

50

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Going back 140 years, it shows you the type of returns you might expect holding stocks 20... 30... or even 50 years.

As you can see there are NO negative returns over those longer time spans.

While it's common to lose 5% or 10% in a given year... or even as much as 38% in a bad year, it's unlikely you'll lose any money if you hold for at least 20 years.

But take a closer look at that 20-year holding period. It shows that it's entirely possible to hold stocks for 20 years and ONLY make 0.7% a year! Sure, you wouldn't have lost a penny in the stock market, but that return is downright puny! A $10,000 investment would have turned into just $11,497 in two decades!

So, if you started seriously investing when you were 45 and were hoping to retire around age 65... and either play golf or lie on the beach every day... you would now need to keep working another 10 or 20 years just to get by.

Wall Street tells you to buy-and-hold... that stocks always go UP in the long run... but it fails to mention that sometimes they go up VERY LITTLE!

That brings me to the second fatal flaw with buy-and-hold...

Your success is highly dependent on luck.

Were you lucky enough to start investing at just the perfect time? Thirteen years after the 1929 stock market crash or in August 1982, when the Regan bull market lifted off, or in March 2009 after the 2007-08 Great Financial Crisis bottomed out...?

The cold hard truth is that your "starting point" has a HUGE impact on YOUR long-term performance with the buy-and-hold strategy. And that's a factor that's completely out of your control. That's because your starting point is highly dependent on when you were born, when you begin your career, and when you begin saving and investing.

You can't do anything to change your life's personal clock. And unfortunately, you can't do anything to change the market's "clock" either. All you can do is hope that you're lucky enough to begin investing just as a long-term bull market is about to lift off.

But Wall Street won't tell you that.

Look at this next chart. It shows the buy-and-hold returns for various periods between 1929 and today...

As you can see, it clearly shows that the returns of buy-and-hold are EXTREMELY dependent on your starting point. If you were LUCKY enough to start investing in 1944 or 1982, you scored big time. Your $1 would have turned into $10.83 (983% over 20 years) and $11.90 (1,090% over 17 years).

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The Trouble with Buy-&-Hold

$14

$12

$10

$8

$6

$4

$2

$1.08

$0 1929-1943

Growth of $1 (S&P500) (inflation-adjusted)

$10.83

$11.90

1944-1964

$0.94 1965-1981

$1.35 1982-1999 2000-Present

But if you started investing with buy-and-hold in 1929 or 1965, you were nowhere near as lucky. Your $1 in 1929 would have grown to just $1.08 (a measly 8% cumulative return in 14 years) and your $1 in 1965 would have SHRANK to $0.94 cents (a 6% loss in 16 years.)

So, while buy-and-hold has worked fine for some folks, its success has had little to do with markets and more to do with timing.

Having my financial future be largely determined by luck is simply not good enough for me. It shouldn't be for you either. And thankfully, now you no longer need to rely on luck for your future investment successes.

In fact, you now have the tools to escape the grip of lady luck when it comes to achieving longterm success in the markets.

The third flaw with Wall Street's buy-and-hold mantra is that, as I've reiterated many times in this report, 99% of investors simply can't follow it.

Consider what Warren Buffett has said about investing in stocks. I'll paraphrase:

"If you can't stomach watching your portfolio lose 50% of its value at any time, you shouldn't be investing in stocks."

Here's the cruelest thing about buy-and-hold: it assumes that, if you have enough time between today and retirement, you can simply ignore the short-term gyrations and volatility inherent in stocks.

In theory, it sounds all good and well. But as the late, great Yogi Berra said: "In theory there is no difference between theory and practice. In practice there is."

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In reality... in practice... almost no one can ignore volatility... sit through pullback, corrections, and bear markets... and stay steadfast when a full-blown market crash rolls around, as it did in 07/08. Everyone knows you're SUPPOSED TO "buy low and sell high." But troves of real-world data show convincingly that investors actually do just the opposite. We buy high (because it feels safer to buy after prices have risen... and we sell low (because falling prices only stoke the worst of our fears). I saw this "buy high, sell low" misbehavior first-hand... Remember, in 2008, I was working as an advisor for a Fortune 500 financial planning firm? Each week I met with dozens of families, trying to show them long-term investment strategies that would get them to financial freedom. There were just two little problems... First, the market was tanking and second, all my clients were selling. They were not supposed to be selling. They were supposed to be buying. You see, in theory, any investor who was about 50 years old or younger should have simply held their portfolio of stocks through the Great Financial Crisis of 2008. "Invest for the long-haul," right?! That's what buy-and-hold requires ? your dutiful long-term commitment. But in practice, that's not what happened. So, with buy-and-hold clearly being a bad idea, how can you save more than half your wealth during the next market crash?

THINK ABOUT WARREN BUFFETT'S TWO RULES FOR INVESTING...

Rule #1: Never lose money. Rule #2: Never forget rule #1. I take issue with Warren Buffett's "never lose money" mantra, but only on a technicality. I think it's impossible to invest in financial markets and, literally, "never lose money." No one has a 100% perfect track record, not even Warren Buffett. So, I prefer to say: "Never lose all of your money." That's what capital preservation is all about! And that's how you can save more than half your wealth during any market crash. No matter what, you should act in a way that ensures you keep at least some of your money

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for tomorrow. No matter what, make certain you operate in a way that allows you to live to fight another day. It's as simple as that. Yet, many investors fail to fully embrace this ? both in philosophy and practice. And the buyand-hold doctrine completely fails investors when it comes to capital preservation. I'm sorry... but telling me to just "buy and hold (and hope)..." telling me everything will be fine, as long as I close my eyes and ignore my account statements for 30 years or more... that just doesn't cut it for me! Simply put: buy-and-hold needs a safety valve.

HOW TO SAVE MORE DURING THE NEXT MARKET CRASH

The safety valve is all about capital preservation. It ensures we don't lose all of our money. It ensures we aren't faced with the tough decision to sell our portfolios when they're down 80%. One way to do that is by adding a capital preservation component to your buy-and-hold portfolio simply by following these two rules: Rule #1: Buy-and-hold, but only if the stock market is above its 200-day average. Rule #2: Sell stocks (move to cash), if the stock market is below its 200-day average. That's it. It's simple advice. So simple that I suspect most investors will ignore it. But if you're serious, truly serious, about capturing the long-run returns that stocks provide and preserving capital, then consider this... If you had bought $100,000 worth of shares of the S&P 500 in 1965 and held through today, you could have earned a profit of nearly $2.2 million. Notice I say "could have." Buy-and-hold suffered a 56% drawdown during the 2008 financial crisis. So, earning that $2.2 million return would have required unshakable discipline to the buy-and-hold doctrine. And that's why a capital preservation strategy is far superior. Anyone who had followed the two simple rules of capital preservation investing could have done a lot better in 2008. Get this...

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The capital preservation strategy recommended moving to cash on December 28, 2007. And it recommended remaining in cash for the entire year of 2008! While the traditional buy-and-hold strategy suffered a maximum drawdown of 56% through the Great Financial Crisis, the capital preservation strategy was down just 13%, before moving to the safety of cash for the entire year. Clearly, a capital preservation strategy saved hides in 2008. But it also saved investors from many wealth-destroying periods over the last 50 years. That's what it's all about. It's about finding a way to participate in the stock market's bullish bias... but only when it's relatively safe to do so. And then, when the risks are too high, it's about sitting safely on the sidelines, in cash. I call this strategy "buy-and-hold-and-preserve." And I'm convinced that it's a far safer option than buy-and-hold.

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