Image Source: UnsplashAnd that volatility and ultimate market rally is the exact thesis of recent Do You Ever Wonder podcast guest, money manager, and behavioral financier Jonathan R. Blau with over $1.5 billion in AUM!Jonathan’s point…’Although stocks are volatile and each year will at some point decline, (some years more than others i.e. the tech bubble, 9/11, 2008 Financial Crisis), regardless of the reason for those declines stock indexes have historically continued to move higher and beat the inflation rate by a significant amount.’The Key To Investor Success Is Preserving Purchasing Power — Not Principal — At Fusion Family Wealth!In other words, forget what you thought you knew about investing!In essence, the key to having adequate money when retirement age is reached and beyond is to preserve purchasing power over time.How? By consistently beating inflation. If portfolio returns do not surpass inflation growth, then over time higher prices will whittle away principle as the investor grows older!But with an investing style based on purchasing power preservation, investors need the emotional strength to sit back with a predominantly equity portfolio and ride through the inevitable gyrations in principle! That may sound relatively simple, but the difficulty in doing this is the basis of behavioral finance.Behavioral Finance…Jonathan Blau, Founder and CEO of Fusion Family Wealth, stops clients from making the emotional mistakes that ultimately lead to running out of money when it’s needed most!Typical Investor Behavior1) Fight or Flight – Panic reactions leading to selling market bottoms, and euphoric reactions leading to chasing stocks at elevated prices.
2) Emotion – Psychologically the pain of loss is 2X worse than the thrill of gains, leading to holding losers and selling winners.Overcoming Typical Investor Behavior1) Learn real risks, aka the loss of purchasing power!
2) Develop a goal-focused plan.
3) Diversify – Avoid concentration of risk
4) Buying good stock investments on saleToday’s discussion with Jonathan systematically convinced Do You Ever Wonder host Mike Haltman that his long-held beliefs about investing and portfolio structure were wrong.In other words, the traditional 60/40 stock/bond portfolio adjusted over time becoming even more bond-heavy as investors age, falls short of meeting most long-term financial goals.Why? Because the investor is going to lose what really matters…Purchasing Power!According to Jonathan, for an investor to maintain purchasing power over time, including throughout their retirement years, a portfolio should be close to 100% stocks.Although stocks are volatile and each year will at some point decline, (some years more than others i.e. the tech bubble, 9/11, 2008 Financial Crisis), regardless of the reason for those declines stock indexes have historically continued to move higher and beat the inflation rate by a significant amount.And, dividends have continued to grow.It’s through this growth in stock prices and dividends, that an investor will preserve their purchasing power over time.But it’s the volatility, despite being short-term in nature, where managing investor BEHAVIOR becomes key!First, Consider How Bonds Are The Nemesis Of Maintaining Purchasing PowerTraditional investing would include buying a bond, in this example a 30-year bond with a 5% coupon (use $1MM invested). Each year the investor will receive $50,000 and at the end of the 30 years get the $1MM back.But because that $1MM in principal has not grown, and the income generated has remained the same, inflation has seriously impacted Purchasing Power!But, the concept about bond avoidance and the inadequacy of the traditional bond/stock portfolio mix runs counter to most investors’ emotional need to protect their principal.But sitting with Jonathan Blau and listening to his investing and portfolio structure thesis, Do You Ever Wonder host Mike Haltman became a believer! Because it made perfect sense!Investor Behavior Can Impede Investing Success!Although preserving purchasing power is absolutely critical, it runs into the impediment of investor behavior and psychology that focuses on a desire to preserve principle.Jonathan Blau and his Team stop clients from making the emotional mistakes that ultimately will lead to running out of money at the time that they need it most!Video Length: 00:35:07More By This Author:The Mortgage Market Improves, But the War Rages On
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