Hello, and welcome once again, there are now only two lessons left in Module Two. And this one lesson six is called the five basic truths about investing money. At the end of this lesson, my expectation is you'll be better able to make tactical decisions toward your goal of having more than enough money to retire and enjoy your life for years to come. I'm going to try and talk a little more deliberately In this lesson, as there are lots of numbers to process. Truth number one, the magnitude of gains and losses in your investment accounts matter more than their frequency. Let me say that again, the size of the gains and losses in other words, the extent to which your account value goes up and down.

Over the course of time in your investment accounts matters more than how often these ups and downs occur. Let me create an analogy to help you process this idea. If you've ever played or watched a golf tournament, you know that the winner is the one who hits the ball the least number of times the lowest wins, add up the number of strokes and whoever hits it the fewest times over the course of the event wins the event. Contrast that with tennis, and the number of times you hit the ball over the course of the event is irrelevant. Instead, what matters is how many games and sets you win that determines the winner. My use of this chart is to suggest that investing for retirement is not a game, but that by using a match play versus stroke play model, you'll better understand truth number one, this chart shows the annual returns of the s&p 500 from left to right, for the 10 years 2000 through 2009.

You can see the number of up years exceeded the number of down years, but the down years were really bad. The total return over that 10 year span was negative 9.1% per year, but over the entire 10 year period. Truth number one says that it's the size of the gains and losses that is above all else. It's paramount. When investing money, the market keeps the score. At first glance, it might seem that all you have to do is keep your money invested for 10 years.

Because looking back over the past 80 years, every rolling 10 year period resulted in a positive outcome 95% of the time, the action required from truth number one is to position some of your money exposed to the markets in an account that effectively transfer the risks of bad years to a third party. Once again, it's the car and house story. Truth number two, the markets worst days are just as important as the best days. Going back to 1927. The markets worst days had a far greater effect on portfolio returns in the markets best days. Look at this chart that shows you some numbers.

We're talking here again about the s&p 500 index, which is a proxy for the US stock market over the years. Here's how this plays out over time and yes, I realize it's hard to look closely at the numbers on these charts, and still pay attention to what I'm saying. At some point, you may have to hit the pause button and study the chart before moving on. But let's try. And if you look at the middle column, I'll summarize what you see. $1 invested in 1927 would have grown to $115 and 40 cents by the end of 2015.

Next, miss the 10 best days and instead of $115 and 40 cents, you'd have $38 and 28 cents. Next line $362 and one cent missed the 10 worst days and you end up with $362 and one cent, which would you prefer having $362 or $38. me I'd rather have the larger number which results from not experiencing the 10 worst days in that 88 year timeframe line number for this book. The 10 best days and the 10 worst days. And remember, we're just talking about days here not weeks or months, and you'd have $120 and nine cents. That's only $4 and 69 cents more than the first number, which comes from purely passive Investment Management.

Finally, if you never put that $1 anywhere near the market, and instead put it in a savings account at the nominal interest rate over those same eight years, you'd have $19 and 33 cents. Remember, this is money, you're going to need to pay your bills. The message I'm trying to convey to you is a need to be invested in the markets, but somehow avoid the bad days and still participate in the good days. How much would it cost to end up with 362 instead of 38? Truth number three contributions to your pile of money matter more than your investment returns. These charts are bigger charts and there's no room on the slide for counting.

If you're going to see the numbers, I'm going to explain what's going on if you pause the video and study the chart if you need to. This slide has a 10 year time horizon, and the next one has a 20 year time horizon, you'll see why I've included both in a few minutes. But looking at the 10, year one, it shows that being exposed to the markets, means your pile of money is going to grow and shrink from time to time. Once again, life does not move in a straight line. But regardless of how much time you have left to grow your money, and by that I mean before you retire, and then your years of retirement, the size of your pile of money will largely be a function of the contributions you've made to the pile and market returns. The numbers here and the tenure chart show that show this truth.

In each case, we start with zero and add $10,000 every year. The column on the right shows what you'd have at the end of 10 years if the market grew at 12% per year. In my opinion, that's not realistic for several reasons over the next 10 or 20 years, but even so the growth of the account only accounts for 48% of the total. In this slide, we have the same variables only over 20 years. If you again put $10,000 per year, and there is no growth at all, all you've got is your contributions as seen in column one. The middle column growing at 6% still shows your contributions contributing more to the total than what there is from growth.

Now, the far right column tells a different story. Now your contributions only represent 24% of the total growth Trumps additions. Given the various risks we've been talking about, plus the negatives that will develop from unfavorable demographics and interest rates. I believe that funding your retirement on a projected return of 12% per year is folly. I written about why the next decade or more is likely to see lower than expected or normal investment return rates. You can find what I said in The resource vault.

In my judgment, if you can average 6% positive return on investment over the next 20 years, you're going to consider yourself fortunate. If that happens, your contributions amount to 54 to 52% of the total. And don't forget the lesson number two in this module where I talked about fees in a lower investment return environment, the fees you pay for advice are increasingly a threat to your future financial freedom. I'll spend more time on this in module four. And back in Module Two, lesson three, we discussed sequence of returns risk and how if you retired in 1991, how much better the first 10 years of retirement would be, as opposed to you retiring in 2001 10 years later, and being exposed to the market through 2010. Don't doubt for a minute that there are going to be bad years going forward.

The action suggested by truth number three is to set aside money as soon as You can and don't stop. Over 20 years there are going to be bad market returns. That regardless of how much you're able to set aside, only the first year contribution is subject to a possible bad year in any of the 20 years. The second year will be subject to a bad year in the next 19 years and so on. In short, contributions turned out to be more important over time than anything. Truth number four, prudent risk management means always being prepared.

You need to know that bad days are going to happen. You just don't know when you just know they will happen. I have no chart with this truth just an identification of three broad economic environments that can cause you grief. recessions that bring deep losses that take time to be overcome. Remember truth number one and avoiding bad days. Inflation that erodes your purchasing power over time, and low inflationary growth where the market keeps going up and up like recently If you fail to take advantage of it in a low inflationary growth period, the temptation is to be cautious and keep your money in a bank savings account trying to avoid the massive crash, like the one that just happened.

That's where the $19 and 33 cents you saw in truth number two comes from. You may be congratulating yourself for missing the bad days, but you're still broke. And now truth number five. True diversification is based on sources of risks, not returns. You've probably heard it said that diversification is a key ingredient for accumulating money for retirement. But what does that mean?

I've met people over the years who have told me they were properly diversified, because their money was in certificates of deposit at different banks. Others have suggested they were diversified because they owned a broad range of different stocks, and both are wrong. being truly diversified with your investments is being diversified across a spectrum of risks. This is not an The chart to understand it shows six time periods going back to 1929. The term asset allocation means spreading your accumulating pile of money over a variety of different asset classes in an attempt to be diversified. But even if you think you've got it right, have just 16 years left before you retire in 1981.

Look at the annual inflation percentage in the 1966 1981 time period. The problem with looking at what happened in historic terms is only useful if you properly prepare yourself for what might happen in the future. Another big secret I now reveal is that life unfortunately, in this context, is too often a roll of the dice. But unless you plan to be dead soon, and we all truly hope that's not the case. You have to approach all this with the understanding you cannot know in advance what's going to happen, how it's going to play out. Consequently, you have to be prepared these files truths might frighten you or increase your commitment to getting it as right as possible.

Asset allocation is something you have to accomplish, whether you're growing your pile of money to help with help or without help, it doesn't have to be exhaustive. There is no mandate to have at least 12 different categories of investments in your mix. Just make sure there are a minimum of four or five, and then be prepared to change the mix as economic situations call for different mixes. And of course, the closer you get to actual retirement will also influence your asset allocation mix. You have to make decisions and play the odds. Otherwise, you'll find yourself at the other end of the roadmap and have done nothing to help your cause.

My hope and expectation is by the time you finish all these lessons, you'll find yourself at the resource vault, and will have downloaded every transcript behind these lesson videos. If over time my website disappears. You'll have saved all this to the cloud somewhere and can refresh your brain as you get closer closer to retirement. I'm confident you'll be glad you did. Trooper diversification is based on sources of risks, not investment return. Let's follow the road downhill now to Module Two video number seven