Welcome back. In this episode, we are going to address the question "What is a
long term investment strategy?" The most important vision I want you to
understand is how to choose long term investments for long-range goals. Short
term investments for short range goals. When you see how to make the proper
choices and to be able to eliminate the dangers that cause most people to lose
their money when they're investing for the long run. Or they get scared or they
hunker down or put their money in a bank, you cannot let emotion take over because
that's what causes so many people to miss out in the long term. So, I'm going
to go through some details here on the differences and you are going to be
super empowered by what you hear.
I'm Doug Andrew and I've been a financial strategist for more than 45
years. And primarily a retirement planning specialist. Helping many people
minimize unnecessary taxes and so forth. And so, for a long term strategy, what you
want to do is make sure you don't choose a short term investment. The biggest
mistake I saw people make when they would come to me is they were using
short term investments for long-range goals. Sometimes people would come in and
I say, "Oh, okay. So let me see where your assets are." And they would have 100
thousand, 300 thousand, a million sitting in a bank or credit
union earning 1%. I'm going "What's this for?"
"Well, I didn't know where else to put it. I had one lady that went... Well, I'm
thinking about taking a little trip." Really? To the moon? I mean how much money
do you need in a short term investment? If you park money in a bank or credit
union, that might be for a short range goals less than 5 years. Maybe for a
piano or a baby or something like that or a down payment for a house. When
you're talking about any goal --5 years or longer out, that is what I would
define as a long term goal and it requires a long term strategy. Where you
don't get all antsy about the market or losing or gaining. We live in a day and
age where people wrap their fingers in front of the microwave because it's just
taking too long to heat up their sandwich, right? No. We want to see instant
growth and we get impatient. And that's one of the biggest reasons why people
end up putting money in long term investments for a short range goal. Like
it's a drive up window at a bank or credit union. Do not mix those up. We want
to choose long term investments for the long range goals. So, let's talk about
what some of the best long-term investments are. So, many times I will ask
audiences when I go out and speak and teach, "Did you ever play red light green
light when you were a kid?" Yeah, yeah. If you have not, let me explain. You
know, you play the game and it sort of like a Simon Says. But you turn around
and red light green light. And if they catch you, then you have to take steps
back. Well, I had a series one securities license clear back in 1974. And by the
year 1980, I ended up with about 3,000 clients over 13 western states. And I was
trying to do my darndest to in a long-term strategy have their money
diversified into a portfolio of some of the top mutual funds. And we were doing a
pretty good job at trying to average 12% which is 12 steps C. And so
what happens is many times money in the market you take 20 steps forward a 20%
increase. But the next year you take 10 steps back. And then and then go forward
or back your back and forth. And so, we were trying to average 12%. Well, we
realized that that wasn't maybe the best long-term strategy because people would
get heartburn about the market when it dropped. And I would have to go to the
office and filled phone calls. And I thought, "You know what?" There's got to be
a better strategy that helps people sleep at night especially when the
market takes a nosedive. And I found it is called indexing. And I'm going to
share with you the results of what that does because you don't lose when the
market goes down. And those 3,000 clients were never happier than when I got them
out of the market. But just simply linked their returns to the market to an index.
And index is just a measuring tape. Sort of like that at the Dow Jones or this
S&P --Standard & Poor's 500 or the Russell 2000. Those just measure. The top 30 or
500 or how many different corporations they're measuring. And if
they're up or down, that's an indicator. But see there are institutions that will
link your return to an index. But your money is not at risk in the market in
index. And that's called indexing. Some financial advisors think they understand
this but they don't. And I can sort of stump them in less than 60 seconds. What
we want is to have a strategy that is for long-term but you don't get
heartburn when the market goes down. It's a fact of life. The market
Will be down 30% of the years and in a 10-year period. 3 years, we'll
probably be down. The other 7 years will be up. Just make money on the up
years and don't lose money on the down years. It is amazing how many advisors
never are trained how to do this. Unfortunately. Because sometimes I think
the broker dealers are saying, "Oh, no, no. Just tell your client, just hang in
there. Hang in there." Well, that frustrated a lot of people in
the years 2000 to 2010. When they had to put off retirement, 7 years in the
year 2000 because they lost 40%. And it took four years just to come back.
And then they were going to retire in 2007 or 08. And it took
another 40% hit and it took 4 more years before they could feel like they
could retire. So, they like... They felt like they lost their future. So, let me share
with you just a little snippet about how indexing helped people to triple their
money in that time period instead of sitting there and just barely being back
to break-even. So, indexing could be compared to a
ratchet wrench. If you've ever had a ratchet wrench where you were tightening
a bolt, the way it works is it goes click click, click, click, click. And it tightens
it. But see when you reset, when you come backwards, it doesn't loosen the bolt. And
so, with a writer, you only tighten you. You tighten and then click, click,
click, click. And then tighten. That's what indexing does. It's called
lock in and reset. So, for example, if in a given year the market is up, I get
whatever that index does up to a cap. Now, the insurance institution where I link
my returns to index, they don't actually have my money
invested in the market. Let's say I chose the S&P 500. And if the S&P 500 was let's
say a thousand at the beginning of the period that I was linking. It could be a
calendar year or one year point-to-point. October 3rd to October 3rd to the next
year, they measure. They change in the index that you choose. Now, I diversify
into many different indices but let me simplify. So, if the S&P went up from
1,000 to 1,100 that's a 10% increase. The insurance institution then must pay
me 10% on my my money. If I had a million bucks in there in the year 2000,
they would owe me 100 grand. Now, how can they afford to do that? Because
my money is not in the market. I simply allow them to take the interest on my
money. See, I can choose to let my money just sit in the insurance institution
and earn 4 or 5 percent. That's called their general account portfolio
rate. But if that were 5% like it was in 2000, that's $50,000
of interest on a million. I can just settle for that. But if I feel
bullish about America, I can say, "Take the interest --the 50,000. And
use that in any way you see fit to be able to afford to pay me whatever index
I choose based upon what they offer." Well, this is a no-brainer for them. So, they
have $50,000. So they buy up side options in the S&P 500. Which
means if the SP goes up 10%, they have 100 grand to pay me. But what does
the market loses? I relinquished the interest on my million. But I didn't lose
the million. See, people that had their money in the S&P. They saw their million
go down to 600,000 by the year 2003. If I had indexing and I had
linked every year, I would be at break-even just a million. But everybody
else had to wait four more years to come back to break even.
I start making money again as soon as the market turns around. But in another
episode, I talk about... You know what? I only earn zero in the year 2001. 2002 and
2003 I just said, "Oh, pay me the 5%. And tell everybody stops rubbernecking on
the economic freeway." And the market turns around. And when it turned around,
it came up and I was able to earn up to a cap. Because the insurance company has
to put a cap because they can only buy so many options with the interest on my
million. Because they don't have my full million to work with. So, by doing that,
what happened? From 2000 to 2007, many people following what I am teaching you
doubled their money. A million went to 2 million. Other people in America that had
their money in the market. They were still down and barely back to break-even.
In the next 7 years, 2008, they lost 40% again. We didn't lose. And by the end of
2010, we had tripled our money. By 2015 which quadrupled our money. What would
you rather have? I mean at the end of 2012, 3 million or 1 million. Would you
rather have the heartburn of going up and down in the market or just have the
nice assurance that when the market goes up, you get to participate. When the
market goes down, you don't make anything but you don't lose. So, the key idea here
in order to choose the best long-term investment strategy is choose long term
investments for long-range goals. I prefer the investment vehicle that will
generate the most at the time in life you're going to be using or needing the
money the most. Most people think well you choose the
investment that grows to the most. No. I want to choose the one that will
generate the most after taxes, inflation, market, volatility are taken into
consideration. So, my favorite vehicle I call the laser fund for that very
purpose because it has all the key elements of a prudent investment. But by
using indexing, I don't lose when the market goes down. And I make
money when it goes up. I have averaged about 11
.17%. It runs about 1% to pay not tax. 1% is the cost
of the insurance that the IRS says has to be there in order for it to be tax
free. So, I would rather earn 11 and net 10. I'd rather play red light green
light by going eleven steps forward and one step back to net 10%. Some
years I earned 7 to net 6. Some years I earned 25 to net 24.
But I've averaged earning at least 10 netting 9. Some years 9 netting 8. And
that net is tax-free which is way better than having my money in the market where
the analysts like Dal Bar say that the average mutual fund stock market
investor only earns about 3.5%. That's pretty pathetic.
Eliminate the losses in the first place. If this resonates with you and you want
to learn a little bit more about this and how to solve it, I would recommend
watching this episode and then perhaps getting a free copy of my latest book.