Conventional wisdom in investing means “buy and hold”. This may include sectors, indexes, bonds, or whatever. To be specific, it means you buy certain stocks, mutual funds or exchange traded funds (ETFs) or bonds – and then you don’t sell them. The idea is over time, they will appreciate in value.
History has shown us that while this approach has yielded gains over a period of decades, the month-to-month and year-to-year roller coaster ride can be more than some people can handle.
Why does age matter?
When a person is under age 50 to 55, they are in the accumulation phase of life. The younger a person is, the less of an impact the roller coaster ride has on them. During this accumulation phase of life, a person can “dollar cost average” their way into the future. This means if they invest in somewhat regular intervals, they will invest some of that money when prices are high and some will be made when prices are low. This tends to average out the purchasing price and helps to grow assets over a period of years and even decades.
Another thing about investing during a young person’s accumulation years, is they have less money subject to the ups and downs of the market. So, as the roller coaster ride takes their money up and down, the financial impact is lower than it is later in life.
However, the older a person gets, this whole scenario tends to reverse itself. This happens in three ways:
- A person who is older has finished or nearly finished accumulating their wealth. There are typically not many, if any, accumulation years left.
- Older people usually don’t have enough money to withstand losing 30-50% (or more) in the roller coaster ride of the stock market, and can potentially lose many years of wealth accumulation.
- They also may not have the stomach for the ups and downs, or have the years to recover like they did when they were younger.
In a March 1, 2015 interview with Bloomberg, billionaire investor Stanley Druckenmiller said our aging population will present a “massive, massive problem” for the U.S. in the next 15 years, and “…The young people are not going to be talking about cutting back. There will be nothing to cut back.”
Druckenmiller argues, “…the mushrooming costs of Social Security, Medicare and Medicaid will bankrupt the nation’s youth and eventually result in a crisis worse than the financial meltdown of 2008. The government will have to reduce payments to the elderly.”(1)
Of course, we know if serious cutbacks occur there will be few options left – it won’t go well for the U.S. and our growing entitlement culture.
Why is this a concern right now?
Economies all over the world are slowing down. Stock markets in every country outside the U.S. are experiencing sharp declines. Currencies in the same countries are also dropping dramatically. Finally, the U.S. is joining the ranks of those who are exiting stocks and mutual funds. The U.S. stock market is now dropping and no one has any good answers about how or when it will get back on track.
The concern right now surrounds the further risk ahead. Jim Rogers has been a successful investment manager over the last 50 years. Rogers noted that when the Cyprus economy collapsed, the government actually went in and seized money from personal bank accounts:
“It’s been condoned [now] by the IMF, the European Union, and everybody else in sight; that a government in need, can take assets. We all knew they could tax us…but this is the first time that I’m aware of, that they’ve gone in and taken bank accounts. They took gold from people in the U.S. in the 1930′s…but I’ve never heard of them taking bank accounts. [Now] they’re doing it. So be careful [because], now they can take your bank account under this precedent.”
When asked if bank account confiscation will be going worldwide, Rogers said:
“Well, it’s now in their bag of tricks, but yes, they can do anything they want to now. I for one am worried and I’m taking preparations. Who knows if I’m right or not, but I’d rather be safe than sorry as all of those people who had money in Cyprus have learned. They thought they had a normal bank account…but now it’s been [taken] with the sanctions of many governments and institutions.”
“If people have money in any account, anywhere in the world…cut it down to under the guaranteed amount. They might take that too someday when things get desperate, because the precedent has been set, but that’s where I would start if I had money in the bank anywhere in the world.” (2)
What can I do to help protect my money?
Jim Rickards, in his book The Death of Money, recommends three general ways to best position your money:
1. Get possession of some physical cash.
- The amount of this can vary based on where a person has their money invested right now. I try to work with people to figure out an allocation, how and where to get it and where to store it. Ignoring this component is not wise – period.
2. Look into gold or silver.
- Financial planners and those who are tied to the investment industry like to disparage gold or silver ownership. Don’t let people tell you gold or silver are bad investments. They are not investments; they are an insurance policy against out of control printing of money, which our Federal Reserve has shown they are more than willing to do.
- Observe what the most successful investors in the world are doing. For example, Warren Buffett owns 129 million ounces of silver, and he is not selling. The Chinese government has acquired 3000 to 5000 tons of gold in the last 6 years. No one really knows how much because they haven’t yet disclosed it. This is an estimate. Finally, Billionaire Stanley Druckenmiller just acquired $300 million worth of gold shares.
- An ounce of silver costs somewhere around $16 today. It is wise to start accumulating some.
3. Invest in a strategy that is designed to not take the wild ride down when the U.S. stock market collapses again.
- I spent thousands of hours researching this question. The output of that research and the investment strategies I designed are found on my website at reppondinvestments.com. Details of backtesting and real time performance are on that site.
- Be smart and think for yourself. Look for ways to help avoid the next roller coaster ride down. The case is being made stronger and stronger that buy and hold investing may not work on a consistent basis for investors nearing the end of their accumulation phase.
“Don’t focus on making money. Focus on protecting what you have.” – Paul Tudor Jones, famous money manager (4)