One of Kathy’s proudest achievements was her retirement account, which had almost doubled in value over the previous 5 years. Then the dot com bubble burst, cutting her gains almost in half. She immediately began to worry about retirement, and although she tried not to think about it, her anxiety took a toll at work and at home.
After seven years, Kathy was finally able to breathe again. Her retirement account was back to where it was before the dot com crash.
We all know what happened next.
In October 2007, the roller coaster plunged again. Kathy had the worst financial year of her life in 2008. She was almost 45 by this time, and she didn’t know if she could recover in time to retire.
Fast forward to 2017, and Kathy’s retirement account was enjoying some nice growth. The market had treated her really well over the last decade, but even with the recent gains, she was nervous about the roller coaster again. She knew she couldn’t survive another ride.
So, this year, Kathy decided to take matters into her own hands. She stopped relying on the mainstream financial system and started looking at her investments through a different lens. A lens that allowed her to stress test her retirement strategy.
Now she has positioned her retirement account so it can grow with predictability. Her new strategy has allowed her to get off the roller coaster and finally rest easy about her retirement.
What did Kathy do? And how can you follow her lead to predictable investments of your own?
7 Stress Tests for Your Retirement Investments
Kathy’s goal was to find an investment strategy that would grow at a similar pace to the stock market while insulating her from downside risk. She uses the following 7 stress tests to analyze her investment strategy, and you should, too.
But beware, these stress tests will require you to take off your rose-colored glasses and get real with yourself about your investment strategies.
STRESS TEST #1: If every market started a downward trend tomorrow, would you be likely to lose money?
Include every market: the economy, the stock market, real estate, and commodities. Given widespread dire circumstances, how would your investments perform?
The point is to get real with the risks your investments are exposed to. Allow yourself to experience the feelings you would encounter if the worst market conditions became reality, and you started losing money.
STRESS TEST #2: In the midst of the conditions above, could any of your investments actually have made money?
Believe it or not, Kathy found an investment strategy that will perform in the worst markets. It is not, however, a traditional Wall Street investment.
STRESS TEST #3: Are your investments positioned to perform over the long term? Will they keep up with inflation?
Most investments are exposed to the risks of speculation, just like gambling, and you’ll only make money when the market goes your way. Some alternative investments perform for a short period of time, but when the market shifts before the investment matures, they are also exposed to significant risk.
Kathy’s favorite investments, however, are long-term and enjoy growth in excess of inflation. She really likes how her new strategy preserves wealth through the ups-and-downs in the markets.
STRESS TEST #4: Is the investment you’re considering truly an investment, or does it involve speculation?
The easiest way to answer this question is to understand whether or not the return you get requires a sale to create the yield. True investments have multiple exit strategies. They are predictable and do not require a sale.
With Kathy’s favorite investment, she’s able to make smart decisions about timing and can invest with confidence regardless of what economic or market conditions occur.
STRESS TEST #5: Will the asset behind your investment still be there, regardless of what happens?
Remember Enron? Kathy does. She invested when Enron was hot, and she learned the hard way that some investments can completely evaporate.
Rest assured, though, Kathy’s favorite investment will be around regardless of market conditions, continuing to perform in good times and bad.
STRESS TEST #6: Are there ongoing fees that dilute your returns?
This is your money. Aim for investments without any ongoing fees. If there are fees, make sure they are fair, and tied to performance.
STRESS TEST #7: Do you trust where your retirement is invested?
Here’s where you really need to take off your rose-colored glasses.Be honest with yourself to avoid burying your head in the sand.
Do you like who is watching over your retirement investments? Do you know where your money is invested right now? Have you done research on the companies whose stock you own? Do you know the owners of the companies personally?
Don’t feel bad if you answered “no” to all those questions. Kathy couldn’t say “yes” to them either, but that provided a starting point for her to consider a smarter direction.
Kathy’s favorite investments are extremely transparent, where she knows the owners, their business strategies, their philosophies, and their personalities. She has a direct line to them if she needs it. The likely reason most people don’t own these investments is simply because they don’t know they exist.
Consider All Your Options
Regardless of where your current investments are, you have more options than you may be aware of. If your current investments are in the stock market, real estate, or other alternative assets, your financial advisor may not be aware of Kathy’s discovery.
The intent of this article is not to bash mainstream investments. We all know the stock market has created significant returns over the last decade. But, as Kathy experienced in 2000 and 2008, when the market crashes, all those gains can evaporate before she knows what happened. Also, it can remain stagnant for years and that’s a recipe for long periods of misery for investors.
The real secret is keep all the gains you’ve made and insulate them from any future market volatility. Kathy learned what smart investors know: enjoy the ride, but know when to get off the roller coaster.
4 Key Characteristics of Kathy’s Favorite Investment
You can get off the ride by looking for investments that have these 4 characteristics:
- Insulated from Downside Risk
The best investments should insulate you from downside risk if economic and market conditions turn sour.
- Growth That Outpaces Inflation
Inflation historically grows at a rate of 4%. Make sure your investments grow faster than that. This eliminates CDs and most other low-risk investments.
- Earn a Strong Dividend
This is why you invest! You should be confident the return will be consistent, year after year, regardless of market cycles.
- Little or No Ongoing Fees
A great yield doesn’t do you any good if it just gets diluted by fees.
Kathy, like all smart investors, is positioning her retirement for the long-term by investing in a strategy that eliminates the roller coaster.