Monday, February 7, 2011

Is Portfolio “Recovery” a Joke That Presumes You Are an Idiot?

Is Portfolio “Recovery” a Joke That Presumes You Are an Idiot?

“Sure, the stock market might dip and your nest egg might take a hit, but you’ll eventually recover from those losses.” Right? Wrong and wrong again!

While you may often hear news reports or even some financial advisors put it that way, it is totally inaccurate. No variable investment portfolio works that way – NONE!

Terry J. has agreed to let me use his situation to explain this. Thanks, Terry. We met in the waiting room of my dentist’s office, where we started talking – which is odd for me because, being a typical guy, I usually keep to myself in such environments. In our initial conversation, Terry mentioned that he was nervous about his nest egg, although his financial advisor tells him he shouldn’t be because, after all, guess what? His account has fully “recovered” from the 29 percent hit (or approximately $70,000) it took during the 2008 stock market crash.

I recently heard a saying to the effect that “knowing what’s false is the first step to knowing what’s true.” I in no way mean to imply or infer that Terry’s advisor is a liar. However, his thought process is a complete misrepresentation on two counts.

First of all, the gains of 18 percent and 10.6 percent that Terry’s account made in 2009 and 2010, respectively, are simply not “recoveries.” The fact is, only two possibilities exist when it comes to how variable investment portfolios work, and “recover” is not one of them. They either “gain” or “lose,” period! What’s more, once you lose, you can never (as in, it is 100 percent impossible) gain back what you’ve lost. Ever! Once that money is gone, it’s gone. Terry’s two consecutive years of gains are just that – gains. That is why no investor has ever received his or her investment statement and seen the word “gain” replaced with “recovery.” You are smart, so you understand that such wordplay could create an illusion and prevent further probing. In my humble opinion, this is all a way to calm frayed nerves.

Secondly, Terry added $7,200 in new contributions in 2009, and subsequently gained 18 percent ($1,296) to grow to $8,496. Then in 2010 he added another $7,200 for a new total of $15,696, which gained 10.6 percent ($1,664) for a total of $17,360.

Now here’s the thing. You wouldn’t consider Terry’s $14,400 in additional, totally new contributions which have grown to $17,360 to be a “recovery” of any portion of the $70,000 hit his portfolio took in 2008, would you? Would you then appreciate your financial advisor, a magazine columnist, or anyone else essentially insulting your intelligence with this bogus “recovery” story? That wouldn’t really be much different from 2-year-old Abraham, who was trying to hide from me the other day by covering his face with his palm, would it?

If Terry had utilized an investment strategy with a 2.25 percent floor and a maximum cap of 13.5 percent, under the exact same circumstances, his nest egg would have grown to approximately $333,124, as opposed to “recovering” back to $240,623. That’s a difference of $92,501! Can you imagine how Terry felt after learning the straightforward, indisputable facts and discovering how to get rid of the nervousness surrounding his nest egg? Just so you don’t wonder, this entire process didn’t happen in a single day – that would have been one heck of a long dental appointment!
So, what about you? Do you have any concerns about your nest egg? Are you receiving the absolutely best and most candid information in relation to those concerns? Has the “recovery” illusion come up in your discussions? If you’d like a conversation about some no-nonsense, proven techniques that will work for you without any illusions, call us today at 301.949.4449 or visit us on the Web.


  1. straightforward indeed!

  2. Great post. Mr question is, why do you think so many people just don't say anything when they are given this obviously wrong explanation?


  3. Thank you Peter.

    I think there are several reasons. What client's have told me over time is that they never really settle down to take a hard look. Especially when there are very few to almost no one saying anything different from "recover"

    As I always say just think about it!


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