A Lesson from the Wizard of Oz

Jan 9, 2019 | Risk

Dorothy only wanted to return to Kansas, but the Great Oz was not going to have any part of granting her only wish. However, Toto was able to discover what wasn’t apparent to Dorothy, The Tin Man, Scarecrow or the Cowardly Lion, and brought to life one of the most iconic lines to ever come out of Hollywood.

“Never Mind the Man Behind the Curtain”

Fast forward to the 4th quarter of 2018 and it’s obvious that the “Great Powerful Oz” or at least in the eyes of investors plays the role of the “Volatile Stock Market” and it’s in no mood to deliver our wish (a steady and growing positive market every year). Instead of answering our wishes, it is creating doubt and confusion because no one wants to see their investments go down, let alone when the backdrop to the US Economy is so strong. Such disruptions can distract us from our goal of growing our asset values over our life time.

The question remains, on whether we as investors can look beyond the fright, terror and loud noise made by a volatile stock market, especially when it’s going down. Or, will we have the nerve to pull back the curtain to understand the whole story.

The whole story doesn’t always include positive returns for the stock market every year. The whole story does include market corrections from time to time. Historically speaking, volatile down corrective stock markets as we experienced in the 4th Quarter of 2018 are generally followed by rising markets.

Since 1960, the Dow Jones Stock Average has experienced 8 declines of 20% or greater for an average down of -35.27%, only to rise on average one year later +34% and two-year cumulative return on average of 50.9%. The Average return for 3-month T-Bills (post the above 8 market declines) for the ensuing 1 year and 2 years cumulative is 2.8% and 5.7% respectively. Of course, past performance is not guarantee of future results, and no one knows if or when the market might turn more. **

We all invest our money to reach a long-term goal, whether it’s to beat inflation or accumulate wealth or provide income in retirement. However, as of late, investors have become more focused on annual investment returns because it’s the only measure that seems real in the short term.

If we spend our wealth over our lifetime, then why are we so preoccupied with short-term performance? It’s my theory that we’ve been trained to think this way, because we haven’t had access to the tools that allow us to plan for the future despite the market volatility.

We believe investors should ask themselves two simple questions:

1. What kind of annual average return on my investments do I need to achieve my end goal of either wealth accumulation or retirement income; and have I made the proper assumptions about potential down markets that will surely occur in the future, especially when I can least afford it to happen?

2. Based on your assumed investment return, what kind of distribution rate from your investable assets can you take over your lifetime and still reach your goals?

We want our clients to be able to see the Man Behind the Curtain when planning because long-term financial security is too important not to plan and understand.

Let us help you calculate the returns you’ll need but also the income you’ll require over your lifetime so that you won’t be distracted and stressed by the volatile short-term financial markets.

**Sources: Dow Jones, Wall Street Journal, Yahoo Finance

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