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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Their investments melted away, by about 60 percent to only $28,000Why You Need a Game Plan It was Monday, April 11, six weeks into the Great Bear Market that first bared its teeth in the spring of 2000. The voice on the line sounded desperate. Vern, my name is Jack, and I saw you on CNBC last Friday. What you said about planning makes a lot of sense. The problem is, I think its too late for me. Im an attorney. What I did was so stupid. My wife is ready to divorce me. I thought tech would go up and up, so I took $550,000all of our savingsand borrowed another $150,000, and I plunked it all into tech stocks. Now Im down to about $200,000. What should I do? In the background, his wife sobbed, I told him not to do it. But would he listen to me? Joe has a landscaping and contracting business. He and his wife Pam had most of their savings, about $70,000, in their 401(k). A couple in their early 30s, they were entranced with the power of the bull market. We put it in the funds heavy in technology with the best five-year record. It seemed obvious that that was the wave of the future and tech was really on a roll. One of the funds was up 130 percent in 1999! But like a block of ice carried down the street on a hot summer day, their investments melted away, by about 60 percent to only $28,000. To get back to even again, they have to make about 150 percent on what theyve got left. As they are young, time may be on their side. But theyll need every minute of it. Bill and his wife Judy, both corporate executives in their late 50s, had about $500,000 in investments at the beginning of 2000. He invested their money at the tail end of the boom in a portfolio that included numerous tech and aggressive growth funds and a smattering of seemingly solid stocks like General Electric. Then the bottom dropped out of the market. As his money dwindled, Bill expressed his concerns to his broker. The advice he got: Hang in there, a rebounds coming. It didnt. Instead, the couple rode the market down until they had lost half of what they had invested. By the time they arrived in my office on July 3, 2002, they felt defeated. It may be another five or 10 years before Bill and Judy fulfill their dream of retirement that had been just within their reach. Maybe youre one of the fortunate ones that didnt lose money in the tech crash or the Great Bear Market that began in 2000 and was still raging through mid-2002. But the sad truth is most investors in the market did lose, far more than they should have in a typical market downturn. In the midst of the economic turmoil, September 11th happened. Between a tortuous volatile market and terrorist threats, many who once felt confident about investing are now, understandably, hesitant. Ive taken panic calls from strangers around the country who have lost a lot of their money, in some cases all of it. Where did they go wrong? They had too much offense and not enough defense. They were not prepared for the mind-jarring swings stocks can take. They were more inclined to follow a hot sector trend than to stay on a diversified, seemingly stodgy track. They assumed that the almost unbearable pain of loss would soon enough lead to gain. They thought bad news would always be followed by good news. They thought the market would snap back quickly from any cor rection. They didnt adjust to market conditions by pulling back or even out of the market. They thought it was easy. They had no game plan. These kinds of mistakes are only human. As investors, we can have a tendency to be overly confident and overly optimistic, especially during a prolonged bull market. But often these instincts work to our detriment. In recent years, they led many investors to big losses unrecoverable in the short run and perhaps not recoverable even in the long run. I am writing this book to help make sure these things dont happen to you. If they already did, I want to make sure they dont happen again. My mission, my passion, and the purpose of this book are to help you achieve consistent returns on your investments while making sure you dont lose a bundle. Whether youre starting fresh or starting over, you need an investment game plan. This book will help you get one. Just what is an investment game plan? It is an investment strategy designed to help an individual, couple, or family build wealth while avoiding painful and damaging financial losses. Its partly about picking the right investments. But its also partly about having the confidence that youve put your investing house in order. Over time, those investments and that confidence work together to your benefit. If your game plan is producing solid returns youll have confidence in it, even if its not topping the charts. And if you have confidence in your game plan, youll have the peace of mind to make wise investing decisions in times of panic or euphoria. Panics do happen, and not just in the market. Whether its the sudden loss of a job, an unexpected death in the family, even a terrorist attack, a game plan can enable you to survive a personal financial crisis. More than any single stock, single mutual fund, or single buy or single sell order that you may place, a game plan is the key to successful investing. A game plan is actually fairly easy to devise and maintain. Which is why its ironicand sadthat so few people have one. From what I have observed in my 35 years as a financial planner, the lack of a game plan is the common denominator of investors woes. After the grim markets of 2000 and 2001 and 2002, many investors sense the need for a game plan. But they dont know quite how to go about getting one. Thats where I believe I can help. As a Certified Financial Planner in private practice with more than three decades of experience, Ive helped hundreds of real people meet their financial goals. I have tried a lot of different strategies. Some worked; some didnt. In the process, I have come to understand how to overcome the personal and market-related obstacles that typically prevent investors from turning financial dreams into realities. At the same time, as a long-time active member and former board member of the College for Financial Planning, Ive also kept abreast of the big-picture changes that have shaped the financial services industryand your portfolio. Although I didnt live through the stock market crash of 1929, I have lived through numerous market cycles, and Id like to share some of the lessons Ive learned along the way. In the midst of the turmoil of 2002, when the Standard & Poors 500 Index fell as much as 49.1 percent from its high in 2000, I was reminded of the bear market of 1973-1974 when I was selling mutual funds and real estate. At the time the stock market seemed like it was going to go down forever. Thats the sneaky thing about a down market. Eventually it makes you feel like you have as much of a chance of winning as a bug on a highway trying to face down 18-wheelers. Back in the early 1970s, I remember getting up every morning and watching the S&P 500 Index lose a few more points. Ultimately it amounted to a painful loss in its value of about 42 percent from the beginning of 1973 through 1974. A lot of people learned the wrong lesson from this tough time. They sold their mutual funds and stocks and never did get back into the market. By playing it very safe, they may have protected their remaining money in the short term. But they also never made up their losses. This points out the importance of maintaining a flexible attitude toward investing. Just as I dont believe in blindly buying and holding, I also think its a mistake to sell out and never buy back in. It was during the early 1970s that I came to understand that there are the two major investing risks. There is the more obvious risk of losing actual money and the somewhat subtler risk of missing out on opportunities to increase your wealth through investing. If youve taken a more aggressive approach than you can stomach, you may react to losses in a volatile market by pulling completely out. But if you never take another investment risk, theres very little hope that youll ever make the money back. I saw this sad scenario play itself out back in 1975 when the economy improved and the market started to turn around. A lot of people, burned by their losses, werent there to enjoy the gains. By the end of the year the S&P 500 was up about 31 percent. In 1976 it was up 19.2 percent. Within about three years the S&P 500 recovered. But the investors who dropped out of the market after the S&P 500s 29.8 percent drop in 1974 never experienced this rebound. Fast-forward to the recent past. I dont need to tell you that the carnage is even worse this time. From the beginning of 2000 through 2002, investors watched in disbelief as the value of some of their retirement funds and college tuition funds shrank by half or more and their financial lifeboats were tossed about. By the middle of 2002, CEOs of major companies were being hauled off in handcuffs and several brokerage houses were discredited. |
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