Are You Investing to Survive or to Thrive?

Who doesn’t like the word guarantee? It gives us a comforting feeling when we exchange our money for a product or service to know that we will get our money back if our expectations are not met. But when it comes to most guaranteed financial products, like CD’s, bond funds, and annuities, owners unfortunately don’t realize their expectations have not been met until it’s too late because there’s another guarantee these products fail to address – inflation. If inflation continues at just 2% for the next ten years, $100 worth of groceries today will cost $122 ten years from now.

So if prices almost surely rise in the future, why would savers and retirees buy products like CDs, bond funds, and annuities that fix their spending power, virtually guaranteeing them declining lifestyle over their remaining years? The most common answer is fear. They have been driven to ‘safe’ investments because of bad experiences in the past with stocks and other riskier assets.

But the very same industry that sells them annuities today largely contributed to their fears in the first place; by positioning them in stocks and stock funds that delivered far greater risk than was required to meet their goals. Many left stock investing for good.

Ask anyone to associate the word guarantee with stocks and you will likely hear ‘they are guaranteed to fluctuate,’ just like the banker JP Morgan famously quipped on the steps of the NY Stock Exchange during the market panic that led to the Great Depression. But stocks offer another certainty, if not a guarantee, that no one should miss.

Stocks or more specifically, the global stock market, at its core is the financial expression of mankind’s unceasing efforts to innovate, create, improve, and produce goods and services that improve our condition and generate profits for those who invest in their enterprises. Certainty exists in the assurance that as long as social systems allow, inventors, entrepreneurs, and business people will continue to bring their visions to reality. And equally certain, investors will buy their stocks in hopes of profit and growth.

Invariably recessions or depressions will come along to slow sales and profits and many investors will lose faith and sell their stocks. But ultimately companies will prove their ability to survive and eventually to thrive once again sending their stocks to new highs, drawing the fickle back in. Investing in stocks is at its heart, a confidence vote in mankind’s desire to thrive, rather than to simply survive.

One of the most frequent phrases I hear among my older clients when the subject of retirement communities pops up is “I’d feel like I was giving up.” Retirement community aside, the phrase so aptly describes what many of their friends have in fact already done with their investments by avoiding the perceived risk of stocks only to realize the hidden, but certain risk of inflation, with its steady erosion of lifestyle.

It doesn’t have to be that way. Stocks, when strategically combined with cash and bonds to mitigate volatility, can become a lifestyle- and wealth-enriching combination, dwarfing the perceived benefits of CDs, bonds and annuities. But when I say stocks, I mean HUGE numbers of stocks, in essence the entire world. Ownership is made possible with just two exchange traded funds – VTI and VEU. And when I say bonds, I mean US Treasuries in the 7-10 year maturity range. We use IEF to satisfy this requirement.

Our most conservative portfolio, known as the Risk Averse portfolio lost only 2% in 2007. During the past 8 years, since May of 2007 the indexes comprising our RA portfolio have generated annual returns of 5.4% (after our fee) and compare quite favorably to the returns of the S&P 500 over the same time period – dead equal. Notice how steadily the portfolio travels through time compared to the much larger swings in the S%P 500.


In fact, the comparison is even more compelling when we look back as far as the data allows. Dave Loeper, designer of the Risk Averse portfolio we use, provided me with data he used in his studies to construct what we believe are the most efficient portfolios available for harnessing the wealth-building power of the capital markets.

Take a look below at how the RA portfolio has fared relative to the S&P over the past 40 years. Notice the smoothness once again. But you might also say, look at the ending difference of $1.7 million in favor of the S&P 500. The RA is comprised of only 30% stocks – we have others with increasing amounts of stock. But, remember, return is not the point here – it’s helping our clients stick with their investment program in order to reap the benefits that stocks deliver to their lifestyle. If you were a retiree, which portfolio would you be more likely to hold for the 30 or 40 years of your retirement?


We understand that few retirees would hold a portfolio of 100% stocks, but we also know that many refuse to consider owning even a portion of stocks because it is difficult for them to distinguish emotionally between the modest risk an RA portfolio delivers and the significant risk they may have suffered in their past.

But we continue the struggle to educate because we know how much those ‘guarantees’ of annuities and bond funds can cost retiring couples in their long term quality of life. We could demonstrate for hours on end how the differences can be measured in hundreds of thousands and even millions of dollars, but suffice it to say, we believe it’s the difference between surviving and thriving.