The dangers of passively investing
It’s the holy grail…
The idea of being able to live comfortably off the proceeds of your investing — without ever needing to touch your capital…
I know it feels like a tall order in these times of high inflation, soaring energy bills and a banking crisis to boot.
The stock market has looked risky…nervy…and positively loopy at times these past few months. The idea of relying on it to cover your living costs when you give up work just feels like a pipe dream.
But maybe it isn’t…
You see, it depends on whether — as Greg Canavan says — you view the ASX as a ‘stock market’ or as ‘a market of stocks’.
A subtle difference in language, but it could mean a big difference to your returns.
To understand what I mean by that, you need to look at how most people invest for the long term.
Will you have enough?
Let’s be clear.
Superannuation is a great vehicle to invest in for your retirement…mostly.
It’s simple…clean…easy…light touch. And that’s what most people want.
That’s because most people aren’t investment analysts. They don’t want the stress of figuring out which stocks or assets to buy and when.
So super makes sense to most people. You pay a professional to take those stresses away from you. And when the time comes, if all has gone to plan, you’ve got a pot of cash to see you through your golden days.
It’s a great trade. In a bull market, super is a fabulous system.
And what I want to talk to you about, in this essay and over the next few days, is in no way a replacement for your super.
I’m going to explain how you may be able to compliment the income you get from your super — by taking a slightly different approach with money that’s separate to funds held in your super account.
Let me explain…
Superannuation is a passive investment tool for most people.
Super is part of the financial products and services industry in Australia. And that industry is a profit-making enterprise.
I have no issue with that, but it means two things:
- The banks and funds that make up this industry have commercial obligations to shareholders
- They need to make use of efficiencies to maximise profit
This is why the superannuation sector is organised into a small collection of large funds. It’s more efficient that way.
And most of these large funds are set up for what the industry thinks retirement savers want: growth. That typically means a heavy weighting in stocks.
Now, of course, most people DO want their retirement investments to grow!
But ‘most people’ isn’t everyone. And growth isn’t guaranteed, no matter what you do.
What if you’re more concerned with consolidation than growth?
Imagine you’d been invested since 1991, when compulsory super was introduced…
That’s 31 years. Imagine 31 years of investing and steadily growing your capital…from $0 to $500,000.
Now, imagine there’s a market crash and — because your investment profile is set for ‘growth’ — you lose 40% of it.
That’s $200,000 down the drain. 12 years’ worth of gains wiped out over a few days.
But wait…what if you’re in your mid-60s…and thinking about your drawdown date?
You may have plans. And I’m sure those plans don’t involve making another 12 years of contributions to try and claw back that $200k.
It’s a problem…a risk…a threat. And most people don’t even realise — whether they’re getting on in life, or just starting out.
Now, again, let me say: I’ve got absolutely nothing against super.
In my view, the stock market still represents the best way to build wealth. And for most people, the superannuation system is the best and most efficient way to do that.
But…
Unless you have the capital and the confidence to go self-managed, super is often a ‘one-size-fits-all’ solution.
And that size may not fit you — whether you’re older or want to take on less risk because you’re focused on saving for the longer term.
It doesn’t consider your age, growth goals, changing risk profile, or priorities. It just is what it is — an investment in the stock market. No matter what the stock market is doing.
I look at things differently.
A market of stocks
What I do first and foremost is identify individual stocks that have momentum behind them.
Now, this can happen in any market — bull or bear.
Some sectors trend higher despite what’s happening in the economy — you’ve seen that recently with some mining stocks — especially lithium miners.
Certain stocks within those trending sectors can be performance outliers based on a positive announcement, favourable earnings report, management change, or some other development in their business.
I find them because I’m a stock analyst.
I understand what makes a good company in a good sector, even if that isn’t currently reflected in its stock price and no matter what’s happening in the market.
And I buy them because I’m a trader.
I understand price action. I’ve built indicators that tell me when a stock is likely to trend higher — and others that tell me the best time to buy — relative to the stock’s historical price action.
The same indicators also do the opposite. They tell me when a stock is likely to trend lower. And when’s a good time to sell relative to historical price action.
My trading toolbox also helps me manage risk exposure in every trade the entire time the position is open.
It tells me how much of my capital I should risk on each position relative to where I believe the stock is headed.
It tells me where to set a stop-loss position based on how far the stock could fall if the price turns down. That, in turn, tells me how much I stand to lose if I’m wrong.
I’m simplifying all of this to make my point. If I went into exactly how my trading indicators work as part of a system of trading stocks and managing risk, we’d be here all day.
What you really want to know is: is there a benefit to doing things this way — whether you’re approaching retirement, or you’re just concerned about your long-term savings?
I’ll show you that tomorrow.
But here’s the key point in all this:
My system is ACTIVE
Not passive, like super
It’s dynamic. It moves with the stock price. So if the price moves higher and hits a certain point, I adjust all my metrics to better reflect where the stock is at that time and where it’s likely to go.
That often means adjusting stop-losses, taking profit, protecting your capital, and letting the rest of the position run for as long as the market allows.
It means I’m never wedded to a stock, a company, or a story.
This is about engineering a positive outcome, as best as I can, given the available price and market data. So if the stock falls, I want to make sure that the worst that happens in the trade is that you break even.
It makes sense, doesn’t it?
Especially at the moment.
Many of my trades have been in that position. And my subscribers tell me it makes for a much more comfortable investing experience.
Even though all trading is risky. Even though I still lose trades. I just find you feel much safer when your hands are on the wheel at 100km/h rather than sitting in your lap.
So that’s the main takeaway from this essay.
Your super is great — it’s better to have it than not.
But it may not be set up to account for your age, goals, risk profile, or changing attitudes and desires.
Certainly, if you’re a buy-and-hold investor and you’re ‘overweight growth’ in your portfolio, it can be a disaster if there’s a market crash. Often, you simply don’t have the time left in the market to make back your losses.
But by being more active, I believe it’s possible to achieve a positive outcome relative to all the above factors.
And I’m going to demonstrate that to you in a presentation I’m giving on Friday.
I’m not making any guarantees about performance. And, of course, any trading is risky.
But my aim in any trade is to get you to the position where inflation doesn’t matter so much…
Where banking crises…or even crashes don’t matter so much…
And, depending on how much you have to invest, where you may be able to live off the proceeds of your trading without ever needing to dip into your capital.
Just think about that.
I’ll be back tomorrow.
Sincerely,
 |
Murray Dawes,
Editor, Retirement Trader
