Average Grades? Not In My House!

5337583_sIn 4th grade, the students are graded on a scale of 1 to 4, with 1 being below average and 4 being above average. In June, my 11-year-old daughter, Phoebe, brought home her report card. It was her best report card ever and she knew it. She did great in just about every subject, except for one . . . Library. She had scored a 2. Library . . . really? I was a bit annoyed and explained to her that Library is one of those “gimme” classes that with minimal effort the teachers usually hand out 4s. She responded to me that a 2 is average and is considered a passing grade.
Ugh . . . I know a 2 is passing but I told Phoebe that in life you do not want to just pass. I explained to her that although getting average marks will allow her to pass from grade to grade, it won’t give her the life she really wants. I want her to understand that those who do more than the rest in life get all the rewards.
I was on vacation last week. I do a lot of reading on vacation and so last week I spent a lot of time online reading excerpts from the financial pundits glorifying the past two years’ returns from the S&P, DJIA and the NASDAQ. A lot of these guys always tout the buy and hold strategy. There was even one analyst explaining that if an investor had just bought index funds and simply hung on, they would have had a great couple of years.
Hmm . . . I got thinking. Actually, I got frustrated. These guys are correct, to a point. You see, there are two sides to the investment time line: those times that are up and those times that are down. It struck me that these guys are only telling one side of the story.
Cutter Family Finance readers, you are well educated in the knowledge that we are now six years into a recovery that many believe is significantly distorted by the Fed’s appetite to spend. And while we can debate about the size of the distortion, there should be zero debate that a distortion exists.
Look, recently the S&P almost hit 2,000 and the DJIA broke through 17,000. With the amount of Fed spending and the markets hitting these highs, there should be fireworks going off to signal warning signs. But many of these financial “experts” don’t see them, they are just telling us to hold on for the ride.
So I ask you, Cutter Family Finance readers, do you think there is more risk of the market going up, based on what you know of our financial situation, or the risk of it going down? Do you see the warning signs?
Sometimes I am criticized for my views of the buy and hold strategy. Honestly, I would love for it to work because it really is so simple. There really is not much financial analysis to it. Heck, in my opinion, if the buy and hold strategy were effective, a good portion of the financial services industry would be wiped out because who needs analysis and advice if just a simple reallocation from stocks to bonds each year based upon one’s age would provide a decent return?
Yes, there were times when the buy and hold approach to investing worked great, like in the 1980s and 1990s, I get that. But, if you lived through the ’70s, or suffered during the recent financial crisis that is now referred to as the Lost Decade from 2000-2010, you know that the buy and hold strategy, in effect, provides average returns, at best. But average may just not be good enough.
The underlying premise of the buy and hold strategy is that an investor does not need their money right away. They have time to leave their money invested, not touch it, and over the long haul the ups and downs in the market will average out . . . or maybe not.
How many investors do you know these days who can leave their portfolios alone as it heads south? Most of the folks I talk to in town are very concerned about their life savings and don’t have the liberty to lose it, “temporarily.”
Here is the problem . . . timing and age. I agree with the pundits that a buy and hold strategy can, on average, work over the long term. But, what if you are in retirement or about to enter retirement and your portfolio takes a nose dive? Heck, the most critical time for an investor is five years before retirement and five years after retirement. Significant losses during those times can either prolong the working years or create major setbacks to a retirement lifestyle.
In my opinion, with corporate earnings not very robust, the markets on steroids, and the Fed’s plans staying on cruise control, you should think about what potentially lies ahead. Especially if you cannot afford to be just average. These are the times when those who do more than the rest just might get all the rewards.
Be vigilant and stay alert, because you deserve more.
1 http://tinyurl.com/kwh3m; 2 http://tinyurl.com/ok8glxh; 3 http://tinyurl.com/pksgbt9; 4 http://tinyurl.com/orsds7b; 5 http://tinyurl.com/nuh9sm9.