The Protection with Power

What Financial Professionals May Not Want You to Know

Douglas A. Clancy

• Publisher: Morgan James Publishing
• Year: 2018
• Print ISBN: 9780190626471
• eBook ISBN: 9781683505709
• Topic: Desarrollo personal
• Subtopic: Finanzas personales

The Protection with Power shows those approaching or amid retirement that investing is simpler than their broker wants them to believe. Once they get past the myths and misconceptions in the market, readers see that there are only three things they can do with their money. Written in clear and understandable language, The Protection with Power takes pre-retirees and retirees behind the financial industry's curtain, revealing that the broker's "expertise" they're paying for isn't so great and powerful after all. Readers learn how they can participate in the market more safely, without the need to "trust" a broker or pay high broker fees.

— Chapter 1 —

MYTHS AND MISCONCEPTIONS OF THE MARKET

Our brains are powerful, and we’ve evolved to recognize patterns so that we can repeat them—“monkey see, monkey do,” as they say. Drive a certain way to work every morning, and after a while, you’ll start operating on cruise control. You’ll get to work and not really remember how you got there—you knew the way without seeming to make any conscious decisions.

Have you ever changed residence and after work you started driving to your old home?

Our brains want to grasp onto patterns, giving us shortcuts to operate more efficiently so that we can save our energy for other processes. However, our strong pattern recognition skills leave us vulnerable to conditioning.

Hear a rumor enough times and soon your brain considers it fact. This leads to misconceptions and makes it hard for us to recognize and acknowledge mistakes.

For example, you know the most famous line from The Empire Strikes Back?³

“Luke, I am your father.”

It tops many famous movie quote lists, and it has become completely ingrained in our culture.

Darth Vader never actually says that in the movie.

He really says, “No, I am your father.”

You may remember him saying it the other way—most of us do. This is because we’ve heard or seen it referenced so many times by people that we know, people on TV, in books, articles, etc. But go back and watch the clip from the movie, and you’ll see the real line.

Our brains latch on to “common knowledge,” accepting it as true so that we can focus on more pressing things. This can be helpful for some things, such as remembering the directions to work, but it can also cause problems, as we don’t recognize or question basic mistakes we’ve made, because we think we know the way.

I am not trying to drive people crazy or to make them feel any less smart. I share this with you to convey how easily our brains can grasp onto patterns, associations, and hearsay; how easily we can believe fiction to be fact.

Our minds are predisposed to accept myths and misconceptions, especially if they are repeated to us. It’s important to recognize this before you read what I am going to tell you.

Just because you’ve heard something before, even if you’ve heard it a hundred or a thousand times, does not mean that it’s true.

Sometimes we hear something about an investment that is not true, but we hear it so often that we think, Of course that must be true, it’s common knowledge!

Be careful about what you read on the internet, too. Not everything online is accurate. I pay very close attention to where information is coming from and to make sure that I understand why something would be true, rather than accepting that what I read is true just because it was published.

To properly save for retirement, you need to know the upsides and the downsides of most every common investment in my opinion. Once you know the facts, then you can make good decisions.

I can’t predict the future, and I certainly can’t predict the market, but I can help you become a more informed investor.

To start with, we’re going to counter some common myths and misconceptions in the market.

These myths below are very, very common. When you see them, you may think they are true. I encourage you to keep an open mind.

If something sounds true to you, think about why that might be. Is it because what you’ve been told is based on a good explanation? Or have you heard it so many times, perhaps from people that you trust, that you’ve accepted that it must be true? Perhaps you may even want to believe some of these myths to be true—if they are, it’s good news for you!

Unfortunately, whether it is good for you has no bearing on whether it is true. So, I’m going to tell you what you need to know—even if it’s not what you want to hear.

Myth #1: “A balanced portfolio is a diversified portfolio.”

One of the major misconceptions in the financial industry is about diversification. Diversification means that your money is spread among a variety of different things.

Typically, when the market goes down and clients lose value in their portfolios, their financial professional may respond by telling clients that they need to “rebalance their portfolio to diversify more to minimize their risk of loss.” That’s music to the clients’ ears, and they continue to associate “rebalancing” with “diversifying” and a lack of risk.

However, let’s look at this more closely.

There’s no doubt that diversity—having a range of different things in your portfolio—can help you minimize loss in the event of a market correction. But what does diversity mean?

When a financial professional diversifies your portfolio by, say, moving you out of certain stock funds and into bond funds, it’s true that your portfolio will look a little different.

You may feel some relief because you’ve heard that bonds are safer than stocks, and the deeply ingrained associations between “bonds” and “safe” will make you feel good. If you’re “diversified,” then you can’t possibly lose money . . . right?

Well, no. While traditional bonds may be safer than stocks, the traditional bond portfolio idea has gone by the wayside because lenders can’t do it as much anymore—bonds don’t pay what they used to.

Today’s rebalanced portfolios don’t hold that many traditional bonds. Instead, financial professionals will move clients toward what they call bond funds, which sound similar, but are quite different from traditional bonds. Financial professionals may also call these bond funds fixed income funds. It’s rare to see them called what they really are—bond mutual funds.

Like traditional bonds, if bond funds go up with the market, you most likely won’t receive as much gain as you would with a stock fund.

However, when the market goes down, bond funds are very different from bonds. While many traditional bonds are guaranteed regardless of market performance if held to maturity, bond funds simply may not lose as much as stocks in the event of a downward market correction. Key words: “As much.”

You can still lose money with bond funds. In fact, during certain market corrections, many bond funds lost more than 30 percent.⁴ That’s a big loss for a product that is supposed to be “secure,” particularly if you are in or nearing retirement.

On top of that, bond funds often have a fee attached, which means that whether you make money or lose it, the financial professional and the manager of the fund both get paid out of your money.

If you have bond funds, you may not even be aware of these fees. Wall Street has done an incredible job of hiding their fees on your statements by taking them right out of the returns and embedding them directly into losses without differentiating for clients between market performance and their fees.

Bond funds have lower upside, they do have downside, and they have fees attached. How is that different from the stocks or mutual funds that you were just in?

While a financial professional may put you in bond funds and say that your money is “diversified,” I don’t consider a diversified portfolio in the market to be a balanced portfolio—your money is still 100 percent in the market.

All of it is in one type of money—at risk. You can buy stock in two different companies, or buy two different mutual funds, but they’re in the same category of risk; you can lose money in all of them, so it’s not truly diversified. All your money is in one thing (the market) and not a range of things (balanced).

Of course, financial professionals want you in the market—that’s how they make their living. But if you have all your money in the market, there’s no amount of diversification you can do within the market that will make your portfolio truly balanced, because it is all at risk.

I believe in true diversification. To truly diversify your money, you can’t risk all of it. You should have a balanced portfolio in the market, but you may want to have other types of assets that aren’t tied to market performance. My version of diversification includes both at-risk and risk-free investments.

Myth #2: “It’s never a bad time to buy!”

“Buy low, sell high! Buy high, sell higher!”

These are some of the refrains that you’ll hear from financial professionals and the financial media, who are eager to capitalize on the average investor’s fear of missing out.

Fear of missing out is a powerful motivator, but it rarely leads to good investments. In fact, some of the best decisions we make involve going in the opposite direction of everyone else. But that rational path often clashes with the powerful emotional fear of missing out.

When the market is low, financial professionals will tell you, “It’s a great time to buy, buy, and buy! Sell when it’s high!”

When the market is high (the time they had told you that you should sell), those very same financial professionals encourage you to hold, because “bigger gains are just around the corner!”

But let’s examine their own adage: “Buy low, sell high.”

So, following their claim, you should sell at a high point.

Well, financial professionals may want to keep you in the market even when you are at a high point, because that’s how they earn their living. If you are up, it’s emotionally hard to sell, the fear of missing out—which is no small fear, especially if you bought a hot stock when it was low—may tempt you with the allure of bigger gains to come.

So, they’ll keep you in, even if you reach the “high” point of the “buy low, sell high” pitch. Then, when bigger gains don’t come, and the market corrects downward, you’ll never hear financial professionals tell you to sell. At that point, the market is down again—so it’s a great time to buy more!

“Buy and hold,” they’ll say. “That’s our strategy.”

So, when should you sell?

For many financial professionals, the answer just may be simple:

Never.

Remember Mark Hanna, Matthew McConaughey’s character from The Wol...

Table of contents

• Cover
• Title
• Copyright
• Disclaimer
• Dedication
• Table of Contents
• Acknowledgments
• Author’s Note
• About Protection With Power
• Introduction
• Chapter 1: Myths and Misconceptions of the Market
• Chapter 2: Who’s Who in the Financial World?
• Chapter 3: Market Money, Five-Minute Money, and Protection with Power Money
• Chapter 4: Market Money
• Chapter 5: Five-Minute Money
• Chapter 6: Protection with Power
• Chapter 7: Qualified Money vs. Nonqualified Money, and Why It Matters
• Chapter 8: Annuity Income Riders
• Chapter 9: Should We Continue the Conversation?
• About the author
• How to Get in Touch with Doug