“Elementary, my dear Watson.” The Adventures of Sherlock Holmes, 1939

Nothing is more elementary than risk management when it comes to saving, investing and financial planning. If you, or your advisors, allow the focus to shift to the ever fickle “rate of return” you will soon find yourself out of money or in bankruptcy.

Gary Halbert is insightful. His perspective reflects the common sense that is often wanting in less mature pundits and advisors. I encourage you to read the excerpt from his recent newsletter. It is loaded with wisdom. Better still, take some time and link to the entire article and soak up some of the ideas and information that makes a successful saver and investor, and creates a successful personal economy.

The Stock Market’s Decade-Long Drought

by Gary D. Halbert

April 22, 2008

IN THIS ISSUE:

1. The Stock Market’s “Lost Decade”
2. The Importance Of Risk Management
3. Lesser-Known Investment Risks
4. How To Determine Your Own Risk Tolerance

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The Importance Of Risk Management

Stock market volatility during the recovery phase of a sideways market is often significant, and the last couple of years have been no exception. This volatility is like riding a roller coaster for many investors. New interim highs make them feel that a market rally has taken hold, only to then experience yet another downhill run. Some who can’t stand the fluctuations in value get out of the market and sit on the sidelines, often without any plan for how to get back into the market later on.

 

No matter what the cause, the market’s recent action underscores the inherent risk of investing in the stock market. It also shows the danger of the buy-and-hold strategy, especially one that recommends investing in unmanaged “index” mutual funds. Sure, the markets will likely rebound eventually, but that will be of little consolation to investors who need their money now for retirement, or who may have bailed out of the markets at or near the bottom.

In past E-Letters, I have illustrated the relationship between losses and the amount of return you have to earn just to get back to where you started. Whenever I reprint this “break-even” table, I receive quite a response from readers indicating how this information opened their eyes to the risks they were taking. Because evaluating risks and avoiding large losses is so important, I have reproduced that break-even table below:

Amount of Loss Incurred Return Required To Break Even 10% 11.1% 15% 17.7% 20% 25.0% 25% 33.3% 30% 42.9% 35% 53.9% 40% 66.7% 45% 81.8% 50% 100.0% 60% 150.0% 70% 233.3%

To demonstrate the point of this table, the S&P 500 Index plunged apprx. 45% from its high of 1527.46 during the bear market of 2000-2002. Buy-and-hold index fund investors who suffered that 45% decline had to earn a total cumulative return of over 81%, just to get back to where they were in March of 2000, and it took them over seven years to do so.

However, even though the S&P 500 Index hit a “new record” in May of 2007 (and eventually climbed as high as 1565.15 on October 9th), the subprime debacle and potential recession have taken buy-and-hold investors back under water again! The S&P 500 Index closed at 1390.33 last Friday, down 175 points from its 2007 record territory.

For Nasdaq investors, the situation is much worse. Those who rode the market all the way down, over 70%, will require a return of over 233% just to get back to even, and the Nasdaq Index is nowhere near that point now, some eight years later.

This further illustrates that it is critical to avoid incurring large losses in the first place. If you can keep losses to a minimum, then you spend less time having to make up for lost ground.

Read the entire article here –> http://www.investorsinsight.com/blogs/forecasts_trends/archive/2008/04/22/the-stock-market-s-decade-long-drought.aspx

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SPECIAL OFFER –> The paperback version of  Money for Life…in good times and bad – How to Thrive in the 21st Century will be released on May 1st, 2008. Everyone who buys the e-book version before May 1st will also recieve an autographed copy of the paperback when it is release. No special codes are needed. Thanks for making the purchase befor April 30th. Shipping and handling charges will still apply. –> www.TheMoneyForLifeBook.com

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