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The Protection with Power
What Financial Professionals May Not Want You to Know
Douglas A. Clancy
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eBook - ePub
The Protection with Power
What Financial Professionals May Not Want You to Know
Douglas A. Clancy
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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.
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Sous-sujet
Finances personnellesâ Chapter 1 â
MYTHS AND MISCONCEPTIONS OF THE MARKET
Our brains are powerful, and weâve evolved to recognize patterns so that we can repeat themââmonkey see, monkey do,â as they say. Drive a certain way to work every morning, and after a while, youâll start operating on cruise control. Youâll get to work and not really remember how you got thereâyou 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
âLuke, I am your father.â
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, âNo, I am your father.â
You may remember him saying it the other wayâmost of us do. This is because weâve 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 youâll see the real line.
Our brains latch on to âcommon knowledge,â 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 donât recognize or question basic mistakes weâve 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. Itâs important to recognize this before you read what I am going to tell you.
Just because youâve heard something before, even if youâve heard it a hundred or a thousand times, does not mean that itâs 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, itâs 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 canât predict the future, and I certainly canât predict the market, but I can help you become a more informed investor.
To start with, weâre 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 youâve been told is based on a good explanation? Or have you heard it so many times, perhaps from people that you trust, that youâve accepted that it must be true? Perhaps you may even want to believe some of these myths to be trueâif they are, itâs good news for you!
Unfortunately, whether it is good for you has no bearing on whether it is true. So, Iâm going to tell you what you need to knowâeven if itâs not what you want to hear.
Myth #1: âA balanced portfolio is a diversified portfolio.â
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 ârebalance their portfolio to diversify more to minimize their risk of loss.â Thatâs music to the clientsâ ears, and they continue to associate ârebalancingâ with âdiversifyingâ and a lack of risk.
However, letâs look at this more closely.
Thereâs no doubt that diversityâhaving a range of different things in your portfolioâcan 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, itâs true that your portfolio will look a little different.
You may feel some relief because youâve heard that bonds are safer than stocks, and the deeply ingrained associations between âbondsâ and âsafeâ will make you feel good. If youâre âdiversified,â then you canât 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 canât do it as much anymoreâbonds donât pay what they used to.
Todayâs rebalanced portfolios donât 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. Itâs rare to see them called what they really areâbond mutual funds.
Like traditional bonds, if bond funds go up with the market, you most likely wonât 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: âAs much.â
You can still lose money with bond funds. In fact, during certain market corrections, many bond funds lost more than 30 percent.4 Thatâs a big loss for a product that is supposed to be âsecure,â 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 âdiversified,â I donât consider a diversified portfolio in the market to be a balanced portfolioâyour money is still 100 percent in the market.
All of it is in one type of moneyâat risk. You can buy stock in two different companies, or buy two different mutual funds, but theyâre in the same category of risk; you can lose money in all of them, so itâs 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 marketâthatâs how they make their living. But if you have all your money in the market, thereâs 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 canât risk all of it. You should have a balanced portfolio in the market, but you may want to have other types of assets that arenât tied to market performance. My version of diversification includes both at-risk and risk-free investments.
Myth #2: âItâs never a bad time to buy!â
âBuy low, sell high! Buy high, sell higher!â
These are some of the refrains that youâll hear from financial professionals and the financial media, who are eager to capitalize on the average investorâs 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, âItâs a great time to buy, buy, and buy! Sell when itâs high!â
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 âbigger gains are just around the corner!â
But letâs examine their own adage: âBuy low, sell high.â
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 thatâs how they earn their living. If you are up, itâs emotionally hard to sell, the fear of missing outâwhich is no small fear, especially if you bought a hot stock when it was lowâmay tempt you with the allure of bigger gains to come.
So, theyâll keep you in, even if you reach the âhighâ point of the âbuy low, sell highâ pitch. Then, when bigger gains donât come, and the market corrects downward, youâll never hear financial professionals tell you to sell. At that point, the market is down againâso itâs a great time to buy more!
âBuy and hold,â theyâll say. âThatâs our strategy.â
So, when should you sell?
For many financial professionals, the answer just may be simple:
Never.
Remember Mark Hanna, Matthew McConaugheyâs character from The Wol...