Figure 4
thick dark “Switching to VUSTX when below” curve. Over
the last 30 years, the stock fund, reinvesting all dividends,
returned approximately 9.41% annualized return, making a
hypothetical $10,000 invested in May of 1986 be worth now
$155,210.15, whereas just by checking once a month and
switching to bonds when markets got dangerous according
to the 20 SMA, might have returned 10.6% annualized, or be
worth now $216,778.94. Over the last 30 ½ years this system
would have been in bonds approximately 20% of the time
and in stocks 80% of the time; it’s diversified over time, just
not at the same time.
Lesson 1 from Figure 4: small differences in the annualized
return can mean huge differences over a long time. Only 1.2%
difference per year meant 40% more total return after 30
years. This bites both ways; a financial advisor or a mutual
fund who charges 1.2%/year will significantly cut into your
total returns down the road.
Lesson 2 from Figure 4: Implementing the 20 SMA system
takes discipline – it only takes minutes each month to watch
the markets once a month, making that calculation, and
then making the appropriate adjustment, if indicated. But if
you watch it more often than once a month, you could get
whipsawed: sell low one month and buy higher before the
next month. Every whipsaw eats into your gains. If you skip
a month or two, the markets could really start tanking before
you know it.
Lesson 3 from Figure 4: You’re probably getting the sense
that most months, you’ll check the numbers and find that
no action need be done. Sure, news raising worries about
the markets will arise and try to scare you away from
the discipline of following your system. Do not let these
emotional distractions bother you. Effective investing
strategies tend to be boring. You do not need Vegas in
your retirement fund.
As a successful entrepreneur, you’ve worked hard to
build and invest in your business. A critical part of long
range planning is to invest outside of your business. I’ve
just shown you that your future depends not on what
you make, but on what you do with what you make, the
importance of starting early, how investing plans need
not be complicated, but must be executed with discipline.
Making money and investing successfully is a skill set. In
the next couple of articles in this series, I will show you
how protecting your wealth and having a spending plan
are separate and equally important components to your
financial well being.
David Yeh is an investment adviser representative with
the Wealthy Doctor Institute LLC, a registered investment
adviser. Information presented is for educational purposes
only and does not intend to make an offer or solicitation for
the sale or purchase of any specific securities, investments,
or investment strategies.
Investments involve risk and unless otherwise stated,
are not guaranteed. Be sure to first consult with a
qualified financial adviser and/or tax professional before
implementing any strategy discussed herein. Past
performance is not indicative of future performance.