7 Impossible Trading Rules To Follow

Over the last two weeks, a lot of the bullish sentiment that was embedded in the market has now given way to fear. I have written many articles previously on investing, portfolio and risk management and the fallacy of long-term “average” rates of returns. Unfortunately, few heed these warnings until it is generally far too late.

Last week, I received an email exposing this problem exactly. I have reprinted it below:

“I realize 55 is pretty late in life to be just figuring this out, but please help me understand the way a work based 401K grows.

I have contributed roughly 6-10% of before tax income every pay period for about 20 years and employer matched an additional 3%.

I have been in several fairly aggressive Vanguard and now Fidelity stock funds averaging about 9-10% growth over the good years. I stupidly assumed there was some form of compounding over that time,but I have come to learn that that is not how it works and that since I never moved to Cash investments preceding the down times to avoid the losses I have probably only gained a total of 8-10% on top of what I contributed on my own.

Luckily I have a pension so not all is lost.”

This email goes to the very core of the fallacy that is continually espoused by the mainstream media with reference to “buy and hold,” “dollar cost averaging,” and “compounding.”

When you are invested in ANY asset that can lose principal value during your investment time horizon, you can NOT compound returns. Compound returns ONLY occur in investments that do not lose principal such bonds, money market accounts and CDs.