Is Your Investing Like A "Bird Box" Challenge – Part 3

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In this 4-part RIA series, I urge investors to develop their “Gut Box,” and not remain blindfolded to the stories that are churned out by Wall Street and regurgitated by the front lines of big-box financial retailers. Their objective is to keep money invested in stocks regardless of how long it takes to recover from losses. Losses don’t matter to them. They matter to you.

Which brings me to the scion of Wall Street’s stories. The big daddy. The fable so entrenched it’s a religion.

It’s not if you heard this one – it’s how many times you’ve heard it.

“Stocks are for the long run.”

Heck, there are books about the topic everywhere. It’s a darn religion. To sell stocks or surgically exit markets is like striking a stake into the heart of your broker (or his wallet).

Speaking of stakes: Have you ever wondered how vampires have managed to become so wealthy and live in such lush mansions on big hills? Easy. They began investing in the stock market back in 1871 and never sold. They averaged that ethereal promise of 10% annual compounded returns for stocks!

Alas, as humans we do not possess such an opportunity. Not consistently, anyway. You see – institutions are infinite. As flesh & blood, we are finite. To markets, 10 years is a half beat from an eternal heart. To individual investors, a decade can be a heart attack.

I guarantee (in financial services, a guarantee is a four-letter word), that stocks will be higher in a century. I also guarantee that you won’t care either.

So, let’s adjust your gut box, shall we? Pay attention to the following tenets. Your wealth will thank you in the end (the human end).

Stocks are not safer in the long run.

Remember – it’s not stocks for the long term, it’s stocks for YOUR TERM.

Don’t be blinded by the panacea of stocks. Markets are irrational. Markets are driven by emotion. Even the father of Modern Portfolio Theory, Harry Markowitz wrote his seminal thesis originally for institutions, NOT people. The financial industry highjacked his work to sell product. Plain and simple.

Unlike the cancerous dogma communicated by money managers like Ken Fisher who boldly states that in the long-run, stocks are safer than cash, stocks are not less risky the longer you hold them. Unfortunately, academic research that contradicts the Wall Street machine rarely filters down to retail investors. One such analysis is entitled “On The Risk Of Stocks In The Long Run,” by prolific author Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University.

In the study, he busts the conventional wisdom that riskiness of stocks diminishes with the length of one’s time horizon. The basis of Wall Street’s counter-argument is the observation that the longer the time horizon, the smaller the probability of a shortfall. Therefore, stocks are less risky the longer they’re held. In Ken Fisher’s opinion, stocks are less risky than the risk-free rate of interest (or cash) in the long run. Well, then it should be plausible for the cost of insuring against earning less than the risk-free rate of interest to decline as the length of the investment horizon increases.

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