From post-earthquake tsunami warnings to hurricane trajectory models, disaster prevention is a hallmark of modern, advanced societies. Market crashes threaten investors with potentially catastrophic financial demise, yet no similar investment disaster plan exists to warn them of impending danger. You can often replace all of a home. If you lose all of your money or a great deal of it that may not be so easy. And replacing the home isn’t easy.
Misleading Information: It’s Happenning
Major market crashes are too devastating and might occur too frequently to ignore. Investors who are at or near the end of their earning years when these crashes strike face delayed retirement, a downgraded lifestyle, or both. They are told to hold on for a predicted comeback which, one day, may not come. Think Japan down over 50% since 1988 (28 Years as of March 2016!)
This reality does not bode well for the investment industry, whose singular organizing principle is to get people to invest.
Large investment companies arm financial advisors with positively worded literature that portrays crashes as anomalies that are always followed by speedy recoveries.
Some common themes include:
- The market always comes back.
- The market always goes up over time.
- Investors who hold on through a crash will enjoy a predetermined recovery in a reasonably short amount of time.
- The crash loss doesn’t matter and can’t be avoided.
Disaster Preparedness Requires Complete Information
Quite a great deal of information distributed by the financial industry is presented with a positive slant; Seemingly for fear that if investors knew the dangers associated with crashes, they would be less likely to invest.
This irresponsible behavior is the equivalent of a real estate broker in Kansas or Oklahoma telling potential homebuyers that since most Midwesterners don't die in tornadoes, there is no need to build a storm shelter. Imagine the auto industry telling car buyers that they don't need to wear seatbelts because the vast majority of drivers don't die in car accidents.
It is assumed, of course, that home and car buyers are better off when they understand and prepare for the dangers associated with driving on the highway or living in Tornado Alley. Yet investors may not be afforded the same degree of transparency regarding the very real and potentially catastrophic financial dangers they face.
Historical Return Data is often averaged, is sometimes one sided, is mostly rosy, sometimes missing material fact, and therefore in our opinion, misleading.
It might be possible to predict some crashes before they happen and sometimes possible to avoid some of the worst damage associated with those crashes—it helps if they have complete information that enables them to develop an investment disaster plan. Investors can potentially manage risk much more efficiently when they have all the information and are prepared for both the best and worst markets. This is not nearly as possible when investment companies guide advisors to selectively spoon feed them only the information that reflects on their products in the most positive light.
If you knew that close to 50% of the time, (historically in the United States, in a slowing economic environment, as evidenced by a declining velocity of money) that once the market goes down more than -20%, it has been (approximately) a 50/50 shot you lose 37% to 89% of your money which would require a recovery of 58% to 809% to recover, would you do anything differently?
No strategy assures success or protects against loss.
It is not possible to determine the top or the bottom of the market. Investing in the market involves risk, including loss of principal, fluctuating prices and the uncertainty of return.
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