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The Biggest Retirement Mistake Investors Still Make and How to Fix It

The most common retirement strategy advisors still give today is "buy a good index mutual fund and hold it forever." That aged approach has been around since I got my start in the markets in the mid-1980s.

Sure, buy and hold is the easiest strategy for a client to follow. After selecting a fund, there is nothing more to do.

That's why it's great for advisors and mutual funds. Keeping your money is their top priority because they get paid based on assets under management, not performance. Plus, redemptions cost funds money and time. For every "sale," they have to deal with paperwork and transaction costs when they sell shares to raise cash for the redemption.

But as investors, taking a buy-and-hold approach with all your retirement assets can be one of the biggest financial mistakes you make.

Today I'll show you the value in taking a more active approach to retirement and give you a few better strategies to grow your nest egg…

Market Pullbacks Don't Always Come at Convenient Times

Buy and hold has done a particularly poor job of protecting nest egg money, especially during two periods over the past 15 years…

Buy-and-holders have seen two drops that exceeded a 50% drawdown since 2000:

retirement mistakeThe first drop shown is the dot-com bubble in 2000. The S&P 500 index dropped 50.5%.

The second is the real estate and credit bubble that topped in October 2007. It led to a 57.6% drop in the S&P 500.

Now the market has recovered and won back the losses, thanks to the second-longest bull market of the last century. The S&P 500 has more than tripled since its March 2009 low.

That's fine for some retirees – if the timing was right…

But the buy-and-hold strategy ignores those who needed some of their funds during the huge drops. And living through two 50+% losses in less than 10 years is a horrible prescription for building wealth.

Plus, many retirees don't really understand what time frame they need to outperform inflation. We have the numbers to give you some perspective…

When Inflation Eats Away at Your Retirement

Ed Easterling of Crestmont Research published the following retirement data in an extensive New York Times article in 2011. He looked at every period of investment from one year to 109 years between 1920 to 2011, and every rolling period in between. (For example, each 20-year period from 1950 to 1969, then 1951 to 1970, etc.)

Accounting for dividends, inflation, and taxes, Easterling concluded that for stable returns that outperform inflation, you need a 60- to 70-year holding period.

He found that from the period of 1970 up until 2011, for any 20-year period, you had a one-in-six chance of a negative return relative to inflation for the whole 20-year hold period.

And the 20-year periods could be very volatile. For example, $10,000 at the end of 1961 would have dwindled to $6,600 by 1981. On the other hand, $10,000 invested at the end of 1979 would have grown to a whopping $48,000 by 1999.

Adding the last three to four years of positive data only improves those odds slightly.

This is why your retirement fund would benefit from some strategy diversification. Supplementing buy and hold with other strategies can provide a strong potential for outperforming in sideways and down markets.

Improve Your Retirement Strategy with an Active Approach

Here are a few strategies that can help you increase your retirement savings and protect it from plunging markets:

Join the conversation. Click here to jump to comments…

About the Author

Nationally recognized technical trader. Background in  engineering, system designs, and risk reduction. 26 years in the markets.

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  1. Ryan Michael O'Brien | November 5, 2015

    Provide advice for a 93 year old.

  2. William Bryans jr | November 17, 2015

    I lost my savings in the market with mutual funds.

  3. William Bryans jr | November 17, 2015

    Hope this helps

  4. Nunya business | March 20, 2017

    You left out the importance of investing in real estate whether it be commercial, residential, or simple land property. Why??? Where is the diversification? Stock market only?? Don't think so!

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