Grab a pen and paper, jot down this equation, and commit it to memory. It may look simple, yet it has the power to greatly impact your quality of life during retirement. However, before I get into that, I’d like to share a story with you.
It’s a story, a parable if you will, about a little girl who doesn’t understand why her mother cuts off the ends of the roast before she puts it in the oven. The mother explains, “That’s the way we’ve always done it. It’s the way your grandma did it.”
“But why?” the daughter asks. The mother replies, “Well, we’re going to grandma’s house this weekend. When we get there, you can ask her.”
That weekend, they go to grandma’s house and the little girl does just that. Grandma laughs and says, “Oh honey, I haven’t done that in years. I used to do that when your mom was little because our roasting pan was so small we had to cut off the ends to make it fit.”
It turned out there was no particular benefit to cutting off the ends of the roast. It was just something this girl’s mother saw during her childhood and continued to do once she grew up. Humans are creatures of habit, and I find this to be a great metaphor that illustrates the fact that we tend to repeat our behavior, whether it makes sense or not.
As I’ve mentioned before, many baby boomers first got serious about investing in the '80s and '90s, in what was the greatest bull market in U.S. history. As a result, many became accustomed to the double-digit gains that became the norm. Boomers also got accustomed to rationalizing things, like ultra-high P/E ratios, since it seemed like we couldn’t lose during that time.
We rationalized it until it blew up in our face — not once, but twice. Even after the two crashes we’ve experienced since the turn of the century, many baby boomers remain overexposed to stock market risk—whether it makes sense or not.
The quick and easy gains that boomers got used to during the '80s and '90s not only led to many becoming addicted to the stock market, but it also led to forgetting the simple, yet powerful, equation: Total Return = Income + Growth
Many stock market-based financial advisors will have you believe the best way to grow your money over the long-term is to invest in stocks. Like cutting the ends of the roast, they continue to focus on Growth through risky stock market investments — whether it makes sense or not.
So, why is it that so many financial advisors don’t talk about the fact that Total Return = Income plus Growth?
Could it be because if they talk about Total Return then they wouldn’t be able to promote the myth that “over the long-term, stocks always outperform bonds”? I’m not saying advisors out there are purposely misleading you; they’re probably just regurgitating a script provided by their firms.
So, let’s look at what happens when we compare stocks and bonds over the long-term, in terms of Total Return.
A recent MarketWatch.com article presented research indicating that in terms of Total Return, stocks and bonds produce similar results over the long-term.
The research shows that if you go back to 1792 and compare the performance of stocks and bonds in terms of Total Return, you’ll see they’ve produced “essentially equal returns” — with the exception of 40 years where stocks outperformed bonds from 1942 through 1982.
So, during this 227 year period, stocks outperformed bonds in terms of total return only 18% of the time. The majority of the time, about 82%, stocks and bonds have had similar results.
Could this be why so many stock market-based advisors don’t talk about Total Return?
These are the types of things that I talk about in my new book, "The Retirement Income Stor-E: The Story Behind the Launch of The Retirement Income Store," due to be published by mid-October. I believe the lessons shared within its pages will shatter many of the myths Wall Street has used to maintain a stronghold on the way Americans plan and save for retirement.
In the book, I outline what I consider a much better and safer method to saving for retirement, one that doesn’t involve taking on more risk. In fact, most will be able to reduce their exposure to stock market risk, while establishing renewable streams of income they can count on well into retirement.
"The Retirement Income Stor-E" is available at TheRetirementIncomeStor-E.com, SimonandSchuster.com, Amazon.com, and BarnesandNoble.com.
David J. Scranton, CLU, ChFC, CFP, CFA, MSFS, is a nationally renowned Money Manager, Amazon Bestselling Author, national TV Host of The Income Generation, Founder of Sound Income Strategies, LLC, The Retirement Income Store®, and Advisors’ Academy. With over 30 years of experience in the industry, Dave specializes in income-generating savings and investment strategies.
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