Ken Moraif  

In this episode of the Retirement Planners of America Podcast, we want to show you why buy and hold could be a disaster for your retirement. So stay tuned. We’re going to get right to it.

Hello, RPOA nation, and welcome back to another episode of the Retirement Planners of America Podcast. And in this episode, we want to talk about the buy hold disaster, as we call it, meaning that if the only thing you do is you buy high quality investments, and you hold them forever, through thick and thin, that that could be a disaster for your retirement. And so we want to show you, very specifically, a period between Y2k and 2015 now, I know what you’re thinking. That was 100 years ago, and you know that will never happen again. Well, let me tell you, folks, if you don’t learn from history, you’re doomed to repeat it. And so learning from history, I think, can be very helpful. So Jeremy, we’re going to talk, we’re going to show very graphically, and I think in very dramatic fashion, what could happen to you if you decide that buy and hold is the only thing you’re going to do absolutely.

Jeremy Thornton  

And I think before we go any further, I am going to be the Debbie downer here. And yeah, and read something that’s a compliance asset

compliance, again, I know the cursive compliance,

so past performance is no guarantee of future results. Each person is different, therefore there isn’t a combination that suits everyone. Diversification is not a strategy without risk. The data in this podcast will reflect our opinion.

Ken Moraif  

Yes, it does reflect our opinion, but it should be everybody’s opinion, right? My opinion,

Jeremy Thornton  

right, the right opinion, right? And

Ken Moraif  

that is my opinion, by the way, right, right. Man, that was boring, yeah, half the people tuned out. We lost our entire

Jeremy Thornton  

audience, right? Tried to hook them in, and then just born to death.

Ken Moraif  

Man, okay, all right, well, we got that over with, so let’s dive in. So, you know, one of the things that we always talk about is that one, we call it a buy hold myth, right? And buy hold, you know, we believe, as I said, it could be disastrous. And I’m going to show you very vividly here in a minute why we think that. But you know, buy and hold is the myth is that, you know the market will always come always comes back right, always comes back right. And you know that may be true, because as we look back in history, the market has always come back right. So the first thing I would say is, does that guarantee you that it will always come back right, okay? And the answer to that is no, okay. And secondly, the question would be, okay, yeah, it may come back, but how long is it going to take? Yeah, when come back? You know, there’s an old expression that says that the market can stay irrational longer than you can stay solvent. So you may be sitting there holding on and thinking, Man, this market’s crazy. Why is it still going down? Doesn’t it know that the fundamental say should be going up, and meanwhile, you’re going broke, yeah? But the worst part of it is that, yes, the market may come back, but if you are taking money out as your investments are falling, yeah, you’re doing what farmers call eating your seed corn, yeah. And the problem with that is that if you eat enough of your seed corn, then yes, growth season may come back, but you may have eaten so much of your seed corn at that point that you ain’t got nothing left to plant, right? And that would be disastrous, right,

Jeremy Thornton  

right? You know, buy and hold to me, feels like a young man’s game or a young person’s game, I should say yes, you can maybe get away with buy and hold in your 20s and your 30s, maybe even in your 40s. Yeah. But as you start approaching that point where you’re not putting money back in and you’re getting to the point where you’re going to start removing your seed core from that that it becomes super important to take a different look, a different strategy. There’s always a different strategy for everyone, but that differing strategy needs to change dramatically as you get closer to that retirement age. Man,

Ken Moraif  

that is so well put, I think I can retire and let you do this for me. That’s awesome. Yeah, no, that’s exactly right. And you know, the most important decade of your financial life, as we see it, is the five years before you retire and the five years after you retire. That decade, we think, is super important to protect your principal. And so as you get closer to that time, you need to start thinking about. How to protect that. But what we’re going to talk about here is, once you are in that first five years, maybe that first 10 or 15 or 20 years of your retirement, you’re taking money out to live on, okay? And the market is doing what it’s doing. And if you’re a buy holder, I think you’re actually a buy hope and prayer, right? We believe that that’s not a good financial plan. It’s a hope and a prayer. Yeah. So I want to go back to the year 2000 and so let me show you this now again. A lot of you’re thinking 2000 was like, you know, 100 years ago. It’ll never happen again. Don’t even think about it. Well, let me tell you, folks, if you don’t, as I said, If you don’t learn from history, then you’re doomed to repeat it. And you know the whole notion about the market coming back? If you look at Japan, for example, they peaked in 1989 their stock market did. And here we are, however many years later that is, and they still haven’t gotten back. So if you were a Japanese investor and you thought that buy and hold was the thing you ought to do, and you were now living on that money, and you’re taking money out. It actually has never come back. And I would argue that you probably run out of money a few years ago at this point. So yes, you know, the market does, always, has always come back. But counting on that we think is not a good idea. So this period here I’m going to show you, is the period from 2000 to 2015 and so let me go over with you the assumptions we’re going to make. So first of all, a million dollars. Jeromy is my favorite number. Yes. Okay. $1 million okay, as was Austin Powers once said. So $1 million is the amount you’re going to invest. Okay, so that’s a nice number, and we’re going to assume that you’re going to take out 4% each year, your annual withdrawal rate is going to be 4% and that’s because, historically, people have said that if you take out 4% you know that your money will last the rest of your life. Okay? And I’m going to show you here how you know. And supposedly, 4% is a conservative amount to take out, et cetera, et cetera, and I’m going to show you how it could, potentially could lead to disaster. Now we’re also going to assume a 2% inflation rate. And so what that means is, is that the cost of living, the amount you’re taking out each year, is going to go up by 2% okay? And now you may say that’s pretty low. If I put in a higher number, yeah, then you run out of money faster. Because if you’re if inflation is going up faster than that, it means you’re gonna have to take out more and if that happens, and everything I show, I’m going to show you will actually accelerate. Yeah. So this is actually a conservative by using 2% inflation. But be that as it may, what I want to do here is, let’s say that you have your million dollar nest egg. Okay, so here’s your million dollars. And now you want to take out 4% all right. And if you take out 4% that would be $40,000 okay, all right, so that’s so far so good. You had a million. You take out 40,000 next thing we want to look at is, what did the stock market do in y, 2k okay, so this is the year 2000 and before I do that, let me show you what your cost of living would do with inflation. So you started with your 40, and by going up by 2% each year, you can see what it does here. And by the 2015 your cost of living now has gotten to $53,835, right? So this, right here, is the effect of what inflation does. Yes, all right, so that’s, and this is, again, is just at 2% inflation. So now I want to talk, go and show you what the market did. So in 2000 the market went down 10% so not terrible, not what you like, but not awful. And so what that translates into is $101,000 of your million dollars got lost due to the fact that the market went down that 10% so the next thing then is, how much total did your portfolio go down? Right? So you started with a million, you took out 40, and the market took out 101,000 so the total now that came out that year would be 141,000 so then what happens is, your nest egg was a million. It’s now 858,000 and you took out that 4% Wow. Okay, so right now you’re a little concerned. You had 1,858,000 is a little concerning, but let’s look at what happens next. Okay, the bondholders would tell you, don’t worry about it. Hey, market always comes back. Yeah, all right, so that bear market actually ended up at lasting two and a half years. So you can see here that we had a 13% loss. In 2001 we had a 23% that was the big the when the teeth came out in that bear market of 23% so if we look at what that meant, that meant that in 2001 you’re 858,000 losing three. 13% went down by 111,000 and then the following year, it went down by 164,000 Ouch, is right, but you got to live, right? You’re not gonna stop living just because the market went down. You got to still eat. You got to pay for your bills. So you’re 40,000 with inflation went up to 40,800 41,600, and so the next thing we look at is how much total came out of your investments. Well, you took out the 40 and the market took out 111 and so the total was 152,000 and then the next year you took out 41 the market took out 164 and now you have 200,000 so where does that leave us? Well, that leaves us with you went from 858 to 499,000 and this is, keep in mind, you’ve been retired three years now, your million dollars, that you your beautiful million dollars in three years at the end of 2002 is down to 499,000 so Jeromy, I’m going to put you in that place. How does that feel?

Jeremy Thornton  

Disastrous? I’m beyond panicking at this point. I’m considering going back

Ken Moraif  

to work, yeah, but you’ve been out of work for three years, right? You’ve been tired, yeah. So what am I going to do? You’re going to go back and compete with those the youngins, maybe. All right. Well, let’s look at what happens next. Buy and holders tell you that, hey, don’t worry about it, right? You’re in your hammock. You’re sipping your mint juleps. The market always comes back. And sure enough, look what happened. In 2003 the market went up 26% and then in 2004 8.9 not a great year, no, five, but Whoa, 13% and then three and a half percent in 2007 So sure enough, yeah, as promised, absolutely, it’s in the brochure. Yeah, market comes back. Well, right? Well, let’s examine how good you are. So what happens is, look at the returns you made. Holy cow. You made 131,052 1777, 21 you’re raking in the cash, baby. Yeah, you like that well. But the problem is, you got to live. So that March is on. So now you spent 4243 4445 46,000 and so the total that came out of your account, or it was added, is a lot smaller than maybe you thought, right? So here’s you put in 89 only 9000 that year. Oops. You turn negative in 2005 had a good year. In six and down 24,000 so where’s your nest egg now? Well, it came back a little bit. You went from 499, which we were freaking out about, and you’re up to 580, okay? And you’re starting to think, well, maybe, you know, there’s a light at the end of this tunnel, absolutely. Well, unfortunately, the light at the end of this tunnel, yeah, is a train, and it’s called 2008 so 2008 comes along, and look what the market did in oh eight. It went down 38% 38% and that translates into $223,000 38% of your 580 and then the next thing with that means you got to still live, right? So you took out another 46,000 47,000 so the total that came out now is $270,000 Oh, and you had 580 Yeah. So how much do you have now? Can you do the math real quick? All right, I’ll do it for you. $309,000 and you’ve been retired eight years, yeah. Oh, but don’t worry. Don’t come back. Right? Exactly. The market always comes back. You don’t have to worry about it, you know. I mean, just be patient, because it’s gonna come back and you’re gonna be fine. You’re a long term investor, right? Right? Long term? Yeah, I gotta think long term here. So now the market does come back. And in fact, from 2009 through 2014 you know, we had a good run, it goes up 23% and all that 29% in 2013 Holy mackerel, we’re raking in the cash a gain. And of course, this is how much money your investments made. But guess what? I just have to spend money, don’t I still have to spend money. You got to live. So now you’re spending 4748 5050, etc. And so what’s the total that happens? So even though you got these nice gains, what happened was that only two of those years of the big bull market, from 2009 through 2014 did you actually have a positive gain in your portfolio. You actually were shrinking the whole time. And where are you now? You’re actually down to $200,000 so you started with 1,000,015 years later, you’re down to $200,000 so again, I’m going to put you in that place. Jeromy, how are you feeling right now?

Jeremy Thornton  

You know, in a some world in which I would hope to be retired for 30 years, I’m halfway and. I don’t think I have half of my million dollars, right? I

Ken Moraif  

mean, you, let’s say you retired when you’re 60. You’re 75 now you’re still a young man. You still got a lot of life ahead, but boy, your money has taken a beating. So let’s look at something really interesting here. And this gets to the eating your seed corn plus, okay, right? So we agreed that you were going to take 4% out, right? But look what your investment has to do over here to compensate so, so this 41,000 that you took out in 2002 that was 6% of your money. You know? I mean, I thought four was where I wanted to be, 6% okay, I can live with that. But look what happens. It goes up to nine, it goes up to 15% and then it gets up to 18% and right now in 2015 it was 20% so if you look forward, what does this mean? It means that now your investments, starting in 2015 need to make 20% every year from now on to compensate for all this. Wow. How are you gonna do that? I mean, I think we’re good, yeah, okay, yeah, but we don’t go promising people they’re gonna make 20% every year for the rest of their life to tread water, to tread water. Yeah, okay, that’s a tough, tough, tough road to hoe. So this is what it looks like. This is the chart. Okay, so you started here with a million dollars. And then look at that. Boom, you bounce off the 499,000 in 2003 the bull market came till 2008 and you got, you actually got back all the way to 600,000 you’re headed back to that million. You’re still not there yet. And then boom, 2008 comes along. You’re down to 300 and then you can’t support it. So, what do you do with this, right? You know, how do you, how do you deal with this? Well, you know, I remember, I went to MBA school. I went to SMU for my MBA, and we had a guest visitor to one of our classes, and he was a billionaire at that time, okay, which, by the way, this was, like, you know, two centuries ago when I was at SMU. So this one is when a billion dollars was a lot of money, yeah, and he had started, is that he’s a serial entrepreneur, okay? And, you know, he’s talking to this class of super smart MBA students, and he said, and he started, I think, like, 40 companies successfully. So, you know, he’s, that’s, that’s what he loved, starting and getting them up there, but he didn’t like managing them after that. But he asked his whole class of really smart MBAs, he said, Okay, so let’s say that you, you know, you have your business, and your biggest customer, who represents 40% of your revenue, walks in the door and says, I’m moving my business to a competitor. So class, what do you do? So the class is like, oh, gosh, okay. So what we do is we get our sales people out there, and we start shaking the bushes, and we need to get some business. And he goes wrong. Okay, so we get our marketing team out, man, we got to start advertising. We got to start getting, you know, getting new business in the door, wrong. And so everybody’s like, Okay, we don’t know what to do. You know, this is smart MBA students, right? We’re supposed to be the next generation. And he goes, You got to cut expenses by 40% Yeah, you got to survive this first, okay, you are hemorrhaging now, and you got to stop the bleeding right now. So what does that have to do with this story? Well, you can see what happened, right? You lost 50% of your money in four years. So now, what do you have to do if you want your money to last as long as you do change your lifestyle, you got to cut costs by 50% to make up the difference. Yeah, because, as I showed in that chart, you’re now taking out 810, 15% and you can’t do that, right? If you’re making six or seven or eight, you can’t be taken out 15, right? So the way to counteract that is, in our view, is you’re going to have to cut your cost of living in half or two thirds. Yeah. And that does not sound like a fun retirement to me. No. So what we believe is that you should have a strategy to address, that you should have a strategy to protect against, you know, these big, bad bears. And, you know, again, you may be saying, Okay, well, that was 2008 that was why 2k Those were your historic bear markets, you know. And that’ll not happen to me, or it won’t happen again. Well, you know the people that lived, you know, through the 70s and the 80s and the 40s and the 30s and the 60s, they all probably said the same thing, oh, well, you know, this was, this was, you know, the oil embargo. It was a historic bear market. We’ll never get that again. And then 80s come along with hyperinflation, well, we’ll never have hyperinflation like that again, you know. And boom, they got hit by hyper inflation, and they got. Hit by the 70s and then the 80s. So if you think that this won’t happen again, you’re putting your head in the sand. And we’re we’re planners, right? We plan for the worst and we hope for the best first, because our view is, we want your money to last as long as you do, and in our view, the only way we can do that is by not only diversifying, not only rebalancing, not only making sure your cost of living doesn’t get out of whack with what your investments, investments can support, but also addressing the single worst enemy you have to your financial well being, in our view, which is bear markets. Yeah, and for that, we have a strategy in our firm we call invest and protect. And for those of you who have not seen our watched our video podcast on that, I encourage you to go find it. Watch that, where we talk about building a strategy into your retirement plan to protect against big, bad bears. Because if you’re going to be retired, hopefully you retire 6065 you know, with technology today and everything that’s happening, it’s possible you could live to be 100 for sure. So you could live more years in retirement than the actual years that you work to accumulate the money you’re not going to retire on. Think about that. Yeah. And so, you know, if you don’t have a strategy to address a big, bad bear, and I’ll ask you, ladies and gentlemen, what, what? What do you give the odds between now and the rest of your life that there’s going to be another big, bad bear market? Yeah, what odds would you give it?

Jeremy Thornton  

I would say probably a 100% chance that that is going to happen. I

Ken Moraif  

would say the same thing, yeah. I would say that over the next 20 or 30 years, the likelihood of another big, bad bear or two or three is very likely. And so then the next question that begs is, okay, if you think that, then doesn’t it make sense to build in a strategy to address what you think is going to happen? Of course, you know, it’s kind of like, you know, our headquarters are in Texas and so down the coastline, hurricanes happen, right? So not preparing for hurricanes would be foolish, right, right? So you build a plan to address it, and you hope that that hurricane isn’t going to hit you. You hope that we don’t have any hurricanes. You hope that if it does happen, it’s not super destructive. You hope for all those things, but you plan for the one that’s the really big bad one. Yeah. And if you’re going to be okay, or you’ve built enough of a defense that it doesn’t destroy you, then that should give you some peace of mind, right? And it should also help you to survive it if it happens. Yes. So that’s the same thing with your investments. We believe that?

Jeremy Thornton  

Yeah, yeah, there’s every single one of those examples that you’ve given, they’re all anomalies. They’re all, oh, that’s just happened one time. That’ll never happen again. Well, it’s never that. Usually it’s not the same thing happening over and over again. It’s a lot of anomalies. And so if you see a pattern of anomalies happening on a consistent basis, you can reliably predict another anomaly of some kind is going to come around again.

Ken Moraif  

Yes, that’s brilliant, yeah. And in fact, if you look back at you know, the y, 2k that was the dot coms, yep, okay. And then 2008 was the credit crisis with all the subprimes. So they’re completely unrelated, although I believe they were both created by the Fed and things that they did. But be that as it may. Yeah, the Great Depression, you know, the oil embargo in the 70s, the stock market crash in, oh, in 87 to this day, nobody actually knows why that happened, right? That was just a mass global panic where people just freaked out, and the market, they just sold off. And nobody knows why that happened. The economy was not in bad shape. There was no thing you can point to that says that’s the reason, other than the herd mentality. Yes, it just started, and it just kept on going and going, and it was

Jeremy Thornton  

horrible. Somebody yelled fire, and everyone panicked. Everybody’s no smoke, yeah, and

Ken Moraif  

there was no smoke. That’s well said, Yeah. So you’re right. What’s going to cause the next one? I have no idea. Yep. But do I think there will be another one? Absolutely? And do I think I should plan ahead for our client base and our skippers? Should we do that absolutely? Yeah? Because if we don’t, I believe we’re not, you know, I don’t believe we’re being responsible with our with the duty we have to our scripters and our clients. Well put. So, ladies and gentlemen, we call that the chart that you were looking at a minute ago, the buy hold disaster. As you can tell, we think that buy and hold is an incomplete strategy. We believe that you should buy, yes, buy quality investments, diversify and rebalance your portfolio on a periodic basis. But we don’t think it’s enough. We think it’s two legs of a three legged stool. The third leg is the sell part. Okay? So if you have, if you have a two legged stool, it’s not gonna be very stable, right? And you don’t want unstable stool, okay, that’s really bad. Oh,

Jeremy Thornton  

I’ll leave that one. I won’t even remark,

Ken Moraif  

yeah, you want solid stools, and so therefore you want that third leg of your stool so it can keep the stool, your stool steady and you don’t fall over. So have a strategy to address bear markets. We think that’s important. So couple things here, make sure you like and subscribe this video. It’ll help us out tremendously, and you’ll get it if you’re subscribed, you’ll never miss one at this podcast. And then also make sure you go to our website, rpoa.com, and you subscribe to our market alert video. This is our weekly video that we send out. And in that one, we actually told everybody, in November of oh seven to sell, to get out, to protect yourself against what came next, which was the credit crisis of 2008 which we talked about, our strategy said to sell the day before the pandemic happened. And you know what happened with the market after that? So we have a strategy to address it, invest and protect and in the market alert videos, we also tell you what we think and where we’re going from here. So thank you for watching. I hope this and listening. I hope this video finds you healthy, wealthy and wise, and we’ll talk soon.