book.chapter Avoiding financial pitfalls

Investing in bonds might seem like a safe bet due to their fixed interest rates, but they're not immune to short-term losses, especially during inflationary periods. For instance, in 2009, bonds dropped by 9.5 percent while global stocks surged by 30 percent. Over extended periods, such as 80 years, stocks have consistently outperformed inflation and provided substantial gains, making them a safer choice for long-term growth. Investors who are well-rested tend to make better decisions. The common advice that anxious investors should stick to bonds doesn't hold up when considering the long-term performance of stocks versus bonds. Over the past three decades, US stocks have increased by 2,509 percent, far outpacing the 524 percent gain from bonds. Stocks have beaten bonds 97 percent of the time, and when bonds do outperform, the margin is relatively small. Ken Fisher warns against the allure of stock-like returns with less risk, as it often leads to significant losses. As retirement approaches, conventional wisdom suggests a conservative portfolio full of Treasuries and cash. However, this ignores several risks, such as outliving your savings, lower interest rates upon bond maturity, missing out on growth stock investments, and future inflation. Without taking on some risk for growth, your investment portfolio's value will diminish due to withdrawals and inflation. Even near retirement, it's crucial to maintain a portion of your portfolio in stocks to ensure adequate funding for the rest of your life. The idea that age should dictate asset allocation is too simplistic. Age is just one factor among others, such as time horizon, return expectations, and cash flow needs, that should influence how you allocate your assets. It's essential to consider all these factors, not just age, when planning your investments. The promise of consistent, above-average returns is unrealistic. The stock market's long-term performance shows that returns are typically either significantly up or down. To achieve an average annual return of 10 percent, investors must accept years of both exceptional gains and losses. Volatility is an inherent part of investing, and Ken Fisher emphasizes that market-like returns come with market-like downsides. The notion of simultaneously preserving capital and achieving growth is a fallacy. These two goals are inherently contradictory. To achieve even modest growth, some risk is necessary, which means moving away from a strict capital preservation strategy. Ken Fisher points out that stocks and a long-term perspective are the best ways to achieve growth and, as a secondary benefit, preserve capital. Trusting your gut in investment decisions is risky due to selective memory. We often remember the gains we missed but forget the losses we avoided. It's important to follow a strategy rather than make impulsive decisions based on gut feelings. Sometimes, the best investment action is inaction, despite the urge to do something. Bear markets are emotionally taxing, but history shows they set the stage for future bull markets. Capitalism's resilience ensures that bull markets, which on average last 57 months with annualized returns of 21 percent, will follow bear markets. It's unwise to bet against them or wait for a perfect market bottom to invest, as the most significant returns often occur swiftly at the start of a bull market. Investment styles, such as large cap, small cap, or value investing, go in and out of favor. No single category consistently outperforms year after year. Market leadership rotates, and it's important not to become too attached to one investment style or sector. Spotting a con artist may seem challenging, but there are clear warning signs. Be wary of advisers who seek full custody of your investments, promise returns that seem too good to be true, have an unclear investment strategy, claim exclusivity, or rely on testimonials rather than due diligence. The most significant red flag is when an adviser has full control over your money. To prevent fraud, separate custody from decision-making to ensure the integrity of your investments and avoid falling victim to Ponzi schemes.