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Life Is Just Not Predictable Anymore

29830309_sJill’s grandparents were farmers. They were the salt of the earth, a hard-working family. They immigrated here, bought acres and acres of land in the town we grew up in, and worked that land. Every day Jill’s grandparents would milk the cows, clean the chicken coops and pick the corn, whatever it took. Not an easy life, but pretty predictable. As they aged, they moved in with Jill’s parents to be taken care of when they could no longer take care of themselves. You see, for hundreds of years, folks led pretty predictable lives and knew that they would be taken care of in their golden years.
 
I do not know when I am going to die. At 47, I exercise, try to eat right and take care of myself. I know I should drop a few pounds, maybe have a little less wine and red meat, but for the most part I hope to live a long time. But things today are not as predictable as they once were. Although I know our girls love us (usually), I do not expect to live with them when we can no longer take care of ourselves. I assume Jill and I will have a long healthy life, but our future is somewhat unknown. So I need to make sure we are prepared financially in the event we can no longer live independently. I plan for this contingency by saving our money and implementing investment strategies that I believe will work.
 
Most of us do this, right? Think about it for a minute. From an early age, we have been conditioned to accumulate assets for retirement. For the most part, many of us contribute to a 401(k), in which we buy and hold mutual funds. We do this in the hopes that at some point in the future things will be okay. We will have enough for our twilight years . . . but we all worry. What if it does not work? What if the average rate of return does not get us to where we need to be? What if by the time we realize that our plan is flawed, it is too late. We either defer retiring, or worse, we retire with a lower standard of living than we had hoped for and fewer options available to us should we need help as we age.
 
So the solution is to create action plans that make sense and limit risk. I know, I know, this is not what the mainstream financial world recommends. Frankly, I have always found that a bit strange. The mainstream financial model suggests that investors just “buy and hold” their investments. They base this approach on a theory called “Efficient Market Theory.” This theory was created in the 1970s and its basic underlying premise is that the markets are efficient. Folks, they are not. Efficiency means that equity prices reflect all of the possible information on the markets, and that people who are bearish balance out those who are bullish. The mainstream financial world has been hanging its hat on this theory for decades. I don’t buy it.
 
Another solution is what I like to refer to as the “Megaphone Portfolio Theory” (MPT). MPT breaks a portfolio into sectors based upon the risk and the amount of drawdown a portfolio can sustain. Investopedia defines drawdown as the peak to trough decline during a specified period of time. MPT uses an active management approach to investing that moves investors out of troubled areas to more secure areas, such as cash, when necessary. So instead of holding on for dear life through a downturn hoping for the best, you sit on the sidelines, protect your investment, and patiently wait for a better day. While you may still have volatility and loss, the goal is to limit losses. You may think that this approach takes a bit more work, and frankly, it does. But like farmers who never shy away from hard work; neither should you.
 
I really do not know why the mainstream financial world does not use strategies that try to limit drawdowns and losses; it seems to make sense to me.
 
Look, my point is this. At the end of the day, we all have a fiscal responsibility to make sound financial decisions for our financial farm. We need to do better than just hoping things turn out for the best. We need to build a strategy that can capture as much of the upside as possible, while actively managing drawdown and taking the necessary steps to limit risk.
 
As much as we love our girls; like I said, Jill and I are not banking on them to take care of us when we are old. So, when it comes time to harvest my financial crop, I need to make sure I don’t have a dust bowl.
 
Be vigilant and stay alert, because you deserve more.