Are Investment Bubbles of This Millennium "The New Norm"?

In my previous article, “The Paradigm Shift… That Altered the Odds of Investing,” I discussed the dynamic change over the past 20 years which has and continues to adversely impact every investor. As an investment coach, teacher, and mentor, I’m frequently asked questions regarding this bubble phenomenon: “Is this “The New Norm?” Is this the best we, as investors, can expect looking forward? How will I ever achieve my financial goals and objectives in this market environment?” Here are my short answers to those questions, respectively: “Who knows? Only if you choose. By learning to play a new game.” That is generally when I get the “Are you for real?” scowl while I’m nodding in the affirmative with a smile on my face.

As I address the true significance of these questions, I take my audience on a brief history lesson before I offer suggestions on how investors can shift the odds of successful investing back in their favor.

Someone’s poisoned the water-hole

My history lesson always begins with a picture depicting two distinct investment landscapes over time and provides some valuable insights regarding the past, present, and perhaps future of investing. The picture I refer to is a daily linear chart of the S&P 500 Index from 1960 to December 24, 2013 (link at bottom of article). As one travels along the timeline of this chart, a dramatic change occurred relative to the shape of this index around 1995. The S&P 500 index is not alone as the DJIA and NASDAQ indexes depict a similar pattern, and most recently in global indices as well. I do not proclaim myself to know all there is about technical and fundamental indicators of the markets, but I firmly believe along about 1995, “someone’s poisoned the water-hole” where long-term investors had come for decades to invest, build, and preserve wealth.

Many financial professionals, professors, and pundits will claim this is no “new norm” as markets have historically experienced similar massive run-ups and meltdowns. Perhaps so, but I would argue not with such regularity and almost predictability as the past 20 years have delivered. It’s almost as if the markets are being intentionally manipulated, and if so, by whom and why?

Is this “the new norm”?

“Who knows?” I don’t nor does anyone else. What the facts are clearly bearing witness to is this “someone” who poisoned the water hole, has deliberately transformed their business model to one of serving their own best interests rather than of their paying clients. In other words, this “someone” is creating bubbles for their direct benefit and at the expense of investors.

So who is this “someone?” Simply put, the entire financial services industry including, but not limited to, investment banks, institutional investors, brokers/dealers, insurance companies, Wall St, the industry’s media and marketing machine, the majority of financial advisers and professionals managing client’s money, and governing agencies.

Why you ask? One reason: GREED. Greed has overcome and permeated this industry to the core as it is now solely focused on corporate profits and bonuses with little, if any, regard for the long-term welfare of investors.

The profound words of John Bogle, Founder of The Vanguard Group, speaks volumes about today’s financial services industry.

“The multiple failings of our flawed financial sector are jeopardizing, not only the retirement security of our nation’s savers, but the economy in which our entire society participates.”

Is this the best we as investors can expect looking forward?

“Only if you choose” is the polite answer I give in a one-on-one setting, but in a group setting or on a webinar, my answer is not only “No,” but “Hell no!”

If you’re doubtful of the financial services industry’s self-serving nature, there’s plenty of evidence over the years supporting such a claim, but one report in particular by Dalbar, Inc. published annually and titled, “Quantitative Analysis of Investor Behavior” (QAIB) demonstrates the breadth of divergence between this industry’s priorities. A key measurement in this annual report is a 20-year rolling average of annual returns comparing the S&P 500 Index and an Average Asset-Allocation Investor, which the vast majority of investors are. In the latest 2013 report, a sad reality and trend continues to be reinforced. Through the end of 2012, the S&P 500 delivered an average annual return of 8.21% from 1993 – 2012, yet the Average Asset-Allocation Investor realized a pathetic annual return of just 2.29%. That’s roughly a 6% annual shortfall or 75% less than what the market earned. What’s even worse is the Average Asset-Allocation Investor also significantly underperformed the market over the 1, 3, 5, and 10-year periods also. There’s something drastically wrong with what investors are earned, or should I say, didn’t earn when compared to what the market delivered over the past 20 years.

How can this be? Two reasons. First, this financial services industry confiscates approximately 2-4% annually in fees alone, legally, and without the investor knowing about it. Second, by investors making investment decisions based on emotions. Emotional decisions cause investors to chase what’s hot making buying decisions when euphoria runs rampant (at or near a market’s peak) and then selling when the pain of loss overcomes them (at or near the bottom of a market meltdown).

Buy high and sell low is not a wise investment strategy for any investor.

How will I ever achieve my financial goals and objectives in this market environment?

“By learning to play a new game,” is the only answer. There’s good news and great news regarding this choice. First, the good news is in today’s technologically-advanced world of readily available and accessible information in the palm of our hands, investors have all the resources to easily play a new game. An informed self empowered investor can manage their own money much more successfully than paying someone to manage it for them. The great news is investors own their power of choice as to whose game they play, and ultimately, whose wealth they build.

If you don’t think allowing someone to confiscate 2-4% of your annual returns is a big deal, consider the fact that over the course of an investor’s lifetime, an investor will lose 70% or more of their wealth potential due to investment fees alone! I don’t know nor have I met any investor who can afford to lose such wealth, and once they learn the facts, would ever choose such a strategy.

So, the choice is simple – investors can play a new game or continue to play the game of the financial services industry.

Where do investors go from here?

No longer can any investor depend solely on a Buy-and-Hold strategy over the long-term to build and preserve wealth. Just consider the past two bubbles where investors lost 40-50% of their wealth during each bubble. Having the proper asset allocation and broad diversification are still important considerations within a portfolio, but these factors alone provide little, if any, protection from the massive losses experienced during bubbles that burst. Being invested 100% of the time throughout a major market meltdown, with the potential risk of losing 40-50% of accumulated wealth, is nothing short of playing a loser’s game.

As the paradigm shifted, investment strategies needed to adapt as well but have failed to do so over time. There’s one key adaptation investors need to integrate into any investment strategy to effectively manage risk and preserve wealth. What is this one key adaptation? Today’s investors must know when it’s prudent to be invested in the markets so they capture the market’s upside potential, and more importantly, to know when it’s time to get out of the markets to preserve accumulated wealth. How can an investor achieve such an objective? By simply integrating a clearly-defined strategy which leverages pre-determined entry and exit triggers.

Investors can no longer afford to ride the emotionally draining and financially devastating roller-coaster of this bubble era.

Maybe it’s time to embrace “The New Norm”!

Here’s what I challenge investors of all ages, genders, and levels-of-wealth to consider if they believe this millennium has ushered in a “New Norm”:

  • Embrace the fact bubbles are here to stay and never again fear them
  • Choose to play a new game where you create and control your destiny
  • Prioritize wealth preservation as your #1 investment objective
  • Invest in low-cost, passively-managed, and tax-efficient Index Funds, ETF’s, and/or Target Date Funds
  • Integrate a clearly-defined strategy with pre-determined entry and exit triggers
  • Understand that investing is not an exact or precise science
  • Exercise your power of choice to your benefit!
  • Enjoy the journey of self-empowered investing as much as the destination!

Investors deserve better than the sub-standard investment returns the financial services industry has delivered year-in and year-out over the past 20 years.

Why not commit today to earn what the markets deliver and then simply learn to protect it? The choice is yours.

S&P 500 Daily Linear Chart

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