This is the second part in a five-part series adapted from the Ty J. Young Inc. webinar, “5 Major Mistakes Retirees Make and How to Avoid Them.”

 

Money is complicated—period. That’s why people devote their lives to studying it and why people make careers out of it—because there will always be investors willing to pay for their management help. Not understanding money is a phenomenon that affects not only many people, but many people specifically between the ages of 55 and 70 either just pre- or just post-retirement.

Not understanding money is blanket concept. But we’ve pinpointed a few specific aspects of investing that most people seem to have trouble with.

Understanding how much it takes to make up for stock market losses.

If you have your money invested in the stock market, it goes down 50 percent and then comes back up 50 percent, you’re even, right? Wrong. If the stock market goes down 50 percent and then comes back up 50 percent, you’re still behind—you have lost money. That’s because you are working with less money when the stock market goes down.

Here’s how it actually works. If the stock market goes down 50 percent, you have to come back up 100 percent just to get even. You have to go up twice as much as you went down, and that process can take years. The good news is, you don’t have to accept stock market risk to earn a reasonable rate of return. The products that we help our clients with allow them to earn reasonable rates of return without risking their principals.

Understanding the difference between a 25-year-old investor and a 55-year-old investor.

What’s the difference between a 25-year-old investor and a 55-year-old investor? Time. Specifically, time to recover. If you are 25 years old and you lose money in the stock market, you have time to recover. If you are 55, 65 or 75, and you lose money that you were counting on to support you in retirement, what are you going to do? Get another job? Move in with your kids? For many people, these are not very attractive options.

The easiest thing to do is to make sure you don’t lose money in the first place. It’s not about how much you make; it’s how much you get to keep.

Understanding diversification.

Diversification is no doubt a smart thing to do. But does diversification equal safety?

Unfortunately, it does not, and here’s an example that illustrates why. In 2008, most wise investors spread their assets out over risk-associated investments like stocks, bonds, mutual funds, gold, real estate, etc. Also in 2008, every major asset class went down at the same time. If you had a well-diversified portfolio, you lost between 30 and 50 percent of your money.

Diversification is beneficial, but it does not equal safety. What does equal safety?

FDIC insurance, treasury bonds and guaranteed insurance contracts are the only three ways to have your money completely protected against market losses. Further diversifying your portfolio across assets that do not involve market risk earns you safety and puts you in a more secure position with your finances.

Among the three types of safe investments, a guaranteed insurance contract is the one that will earn you the highest return at historical averages of 6 to 8 percent annually. These are the types of products that we help our clients with every day at Ty J. Young. Inc.

Stay tuned to Retirement You Earned for the third in our series of “5 Majors Mistakes Retirees Make and How to Avoid Them.” To learn more about how our Ty J. Young Inc. financial advisors can help you make the best decisions for your retirement, call us today at 877-912-1919!

 

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