Allyn: Stephen, most people understand that there are going to be losses in the market. Most of the time the market recovers so why do people need to be concerned when they have a loss?
Stephen: Everyone understands they may have losses in the market. What people may not understand is the impact these losses may have on their life savings.
Let’s look at an example. Let’s say you have your last $100 and you have to make this grow. You invest the money and say a big prayer. Boom, 2000-2002 or 2007-2009 happens. Now your account has been cut in half.
Now, in the next few years your prayers are answered and you gain a 100%. Now you have your $100 back. Are you happy? Twice as happy as you were.
Looks like your average rate of return was 25%. Impressive, right? But how much growth did you have over those years? 0% growth.
Average rate of return can be very deceptive. The market came back but your money didn’t grow and now you’ve lost time and you can’t get that back.
Stephen: The true cost of loss. If you manage to save $100,000 at a young age, let’s say 35, and you can double your money every 10 years. One 50% loss, early on, can have a huge impact over 40 years. If you never had a loss and continued to double your money, you would have $800,000 at the end of that 40 years.
But with one market correction early in the game -- I’m no math wizard -- but that one 50% loss cost you $400,000 of your life savings. I’m pretty sure you would rather have the $800,000. The important thing here is not to chase big gains but to avoid the losses. Because the market did come back, but your money didn’t.
Allyn: But the market is full of losses. How can someone avoid this?
Stephen: They need to have a strategy of safe money combined with growth.
Allyn: You’ve mentioned that you have strategies like this that have both growth and security. Is that right?
Stephen: Yes, absolutely.