A $400,000 mistake?

by Jason I. Henderson, Ph.D.

I’ve been having some fun asking people questions.  These questions help me understand people in general, but also allow me the potential opportunity to do what I love to do – help others achieve their goals in creative and caring ways.

Here is the first question:  “Do you think we’re going to have another serious drop in the markets?”  Assuming you are like 98% of the people I talk to, you will answer yes to that question.  But here is where I struggle, and I am hoping you will comment on this blog post or contact me to help me figure this out: Where it’s written that you have to be okay with losing 30 or 50 or even 70 percent of your money in order to make money in the markets?  I am searching for an answer.  Seriously, does that make any sense?”

Again, assuming you are like most people, you will answer “no, it does not make any sense, and I do not know where that is written.” So then tell me, why do almost all investors seem to follow that unwritten rule?  Furthermore, who do you think benefits from people following this rule? Isn’t Wall Street the benefactor of a rule like that and doesn’t that go against all the math we were taught in school about the time value of money?

Here is an example: take two investors. One does what they are told and never leaves the market. They suffer through losses and lose sleep worrying about whether their money will ever come back. The second investor never loses money and only takes risk when the odds are more in their favor. Assuming each  started with $100,000 at age 40. A serious downturn (i.e. crash) occurs that first year and the first investor loses 50 percent – his money tanks from $100,000 down to $50,000. The second investor sat on the sidelines. Both average 7 percent return for the following 30 years. The rule of 72 dictates their money doubles approximately every ten years. The first investor lost $50,000 that first year, so at age 70 he now has $400,000. The second investor who sat on the sidelines starts with $100,000 and getting the same three doubles as the first investor, grows his money to $800,000 by age 70.

Did that first investor make a $50,000 or a $400,000 mistake?

At Henderson and Floyd we can show you a way to grow wealth and guarantee you will never lose your money, while still having enough liquidity to take advantage of the downturns.  Now that is valuable information.