Beware

I want you to think back. Think back to opening your third quarter investment statements in October. Remember how much was in your account? Remember how good that felt? Beware. Opening your next statement will likely not induce the same feeling.


That being said, if you have assembled a rational investment portfolio that is based on a solid financial plan, you have no reason to worry. Any sound financial plan should incorporate a few bad years in the stock market.


In truth, 2018 wasn’t even that bad of a year. We have reliable returns for the S&P 500, which represents 500 of the largest companies in the United States, going back to 1929. That is 91 calendar years. For us, that means 91 valuable data points to consider.


In 2018, the S&P 500 lost 4.4%. How does that rank in our 91 years of data? History shows there have been 20 years with returns worse than 2018. But even most of those 20 years do not compare to the loss of 2018. The average loss in those 20 years was 16.1%. Last year was a walk in the park in comparison.


It is never enjoyable to see your investment account drop in value. But any informed investor knows it is bound to happen from time to time.


And in fact, the title of this article is not even in reference to opening your end-of-year investment statements. The title is about what is likely to happen as a result of how those statements make you feel.


You see, when the market gets choppy, something very predictable happens. Financial salespeople come out the woodwork. And, boy, do they have a pitch for you. It usually goes something like this.


“We just went through the worst December in the stock market since the Great Depression. Are you concerned about losing money on your investments? Would you be interested in an investment that is guaranteed not to lose money?”


Who wouldn’t want that? Sounds great, right?


Guaranteed, safe, no downside, no risk. These are things you will hear the annuity ads and salespeople tout. They know this pitch sounds enticing when the stock market is volatile. Which is why now is prime time to push their products.


I am often asked by clients about the value of annuities. I offer the same response each time – it depends on the annuity. But I can say with absolute confidence that far more people are sold annuities than actually need them.


Let me be clear: Not all annuities are bad and not all annuity salespeople are unethical. The problem is it’s difficult to distinguish the good products and salespeople from the bad.


At some point I will devote entire article to annuities. They are one the most misunderstood and misused financial instruments on the market today.


Aside from annuities, there is another product that gets play when the market plummets. Gold.


Let me be clear. Just because it looks lovely dangling from an ear or perched on a finger doesn’t necessarily make gold a desirable piece of your portfolio.


So, what will you hear from the gold peddlers? “When the world goes crazy, you will wish you had gold. It is a great store of value.”


The problem with gold is that its value is based on fear. It has no earning stream. It does not produce anything. It just sits there. When you hold gold, you are betting that someone in the future will be willing to pay you a higher price than you paid for it. That’s not investing. That’s speculating.


Think about it. If owning dollars are so bad, why are the gold sellers willing to accept your dollars to part with their precious gold? Beware.


The fourth quarter was tough on stocks. Financial salespeople know that. That is why they will be out in force. Now is the time to prey on your emotions. But making emotional decisions with money is not only ill advised, it’s often harmful to your financial health.


These alternatives to stocks and bonds may have a role to play in your financial life. But that role is typically small, if at all.

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