All I Want for Christmas is Financial Independence
Freedom is not free. At a minimum, we pay taxes to protect our right to the pursuit of happiness with support to the military and law enforcement. For most of us, this is not enough. We seek to be free of financial worry. We seek to be free to enjoy our lives to the fullest and not be constrained by a lack of money. We seek to support the ones we love and enable them to live their lives fully. We seek financial independence. This Christmas, we can commit to giving this gift to ourselves.
What is the price of financial independence? It is 1) courage, 2) investment, and 3) time.
Wealth is built over time through savings and investment. The process does not start until one has the courage to invest their savings in growth assets. The process may be derailed if one loses the courage to remain an investor in uncertain times.
Surprisingly, holding cash rather than investing is the one strategy that consistently loses money over time and most every year. The average annual inflation rate over the last 100 years is 3.22%. That may not sound like much until one realizes that at this rate the value of cash declines by about 50% every 20 years.
Although cash is a loser in the long-term, it offers a safe-haven in the short-term. The problem for many investors is that the short-term stretches into the long-term as they fail to find compelling investments whereby they have the courage to act.
A stock investment cycle looks like a wave pattern. It rises and falls and then rises again. The long-term trend of the wave pattern rises with higher highs and higher lows. If one’s investment horizon is sufficiently long (roughly 25 years or longer), the rises and falls will cancel out and the investor is left with long-term appreciation. If one’s investment horizon is less than 25 years, there is a risk that the investment term ends on a cycle low and investment objectives are not met.
Two conclusions may be drawn: 1) to make money over time, one must not hold cash but invest in growth assets, and 2) downside risk mitigation is important if one’s investment horizon is less than a quarter of a century.
Risk-mitigation is usually not achieved by having an emotional reaction to world events. Stock volatility and the emotions it evokes may cause investors to make bad timing decisions. The average investor (shown with the orange bar in the chart below) has achieved only a 2.1% annualized return over the past twenty years, worse than holding almost any other investment during this time.
Kenny Rogers once sang “If you’re gonna play the game, boy you gotta learn to play it right. You’ve got to know when to hold’em when to fold’em, know when to walk away and know when to run.” This sage advice is best implemented by following a non-emotional, rules-based plan for participating in bullish cycles and avoiding major bearish cycles.
It is far easier to have the courage to be an investor if you have a plan for protecting yourself from major bear markets in advance. Once you have made your investment, it is far easier to remain invested if you have a disciplined, empirical way to separate normal market fluctuations from potentially major downturns.
As always, with this newsletter and with our investment programs, we are committed to helping investors navigate the complex financial markets that enable you to have your financial independence Christmas wish come true.
We invite you to call or email anytime if you have questions about our wealth management solutions or if you want to talk about the overall investment environment as we currently see it. Please give us a call at (415) 249-6337 or email us at email@example.com to learn more.
We wish you a joyful holiday season and a prosperous new year!