Why You Won’t Retire

The first wave of Baby Boomers are just starting to enter retirement. Over the next 20 years, 76 million people will retire. Or so they hope.

Since 2000, the US stock market has been in a Secular Bear Market. Simply defined, a Secular Bear Market occurs when successive security prices do not rise above the previous high.

The majority of investors are still using strategies such as the modern portfolio theory, to diversify their portfolios. Unfortunately, this has not given the expected “historic” returns of 11% per year. Since 2000, the S&P 500 index has returned an annual average of only 2.45%. Hardly the historic return investors have been expecting.

What does this translate into? If $10,000 was invested in the S&P 500 index on 12/31/1999 at the end of 2007 it was worth $11,231.08. A historic annual average of 11% would have grown that $10,000 to $23,045.38. Big difference.

The last Secular Bear Market lasted almost 17 years. In John Mauldin’s 2004 New York Times Business Bestseller Bull’s Eye Investing he states ….”If you invested in the S&P 500 in 1966, it was 16 years before you saw a gain, and 26 years before you had inflation-adjusted gains”

This is why the Baby Boomers may not be able to retire. After the greatest expanse in US economic history (1980 -2000), there is a pretty good chance that this Secular Bear Market will last at least another decade. 76 million Baby Boomers will either have to save more, work past 65, or find an alternate investment strategy.

One such alternative is the use of a Long/Short strategy. The Long/Short Strategy dates back to 1948 when Alfred Jones, a Harvard graduate and former U.S. diplomat, also known as the “Father of the Hedge Fund”, set forth to try to minimize risk in holding long-term stock positions by short selling other stocks, therefore “hedging” risk. Today, this same strategy can be created with the use of mutual funds.

However, the ultimate goal of a Long/Short Hedging strategy is not necessarily “beating the market”, but rather to attempt to minimize the downside risk of being in the market and produce a positive return.

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