In 1975 an unsuccessful man by the name of Gary Dahl was hanging out with friends at their favorite bar. They happened to be discussing their family pets and how much trouble they were. The more they drank the louder they laughed until Gary, without any forethought, blurted out that he had the best pet in the world. His pet needed no food or care or training. “What possible pet is this?” his friends asked. Gary responded that his pet was a perfectly behaved little rock. The group laughed and headed to their homes but the conversation inspired Gary to create the Christmas gift sensation of 1975, the Pet Rock. In a short three months he sold over a million rocks for $4 each (which he purchased for a penny). Then as quickly as it began the fad ended and Gary walked away with a small fortune, leaving a huge pile of unsold rocks in his storage yard.
 
Years ago I attended a convention with a speaker who was teaching us how to build a successful company that would leave a lasting legacy. He asked, “What impact would it have on the world if you disappeared? If your company disappeared?” The question had such impact on me that I keep the saying on my phone where I can see it regularly. It is a humbling thought to consider how and if you will be missed when you are gone.  
 
I have found great value in applying this question to the businesses I evaluate for investment purposes, recognizing that a company that would be desperately missed should have more staying power through the ups and downs of the economy. I suggest investors look through their own portfolios item by item and consider the same question.
 
In many cases you might realize our modern lives have become heavily dependent on the products and services you have invested in. If so, then you are probably on solid footing with these investments. In a few instances you may find companies that produce a currently popular product, but one which could fade away without too many people noticing it gone. With these, proceed with caution lest you be caught holding an investment that was yesterday’s news. And finally, you may even find one or two that fall under the “Pet Rock” heading where the only people who would care if the company failed would be the investors.  I doubt many people still own their pet rocks or would even admit to having bought one.
 
A company whose absence would not be missed may offer a higher risk for a retired investor who needs an income stream they can depend on. As you evaluate your portfolio based on this question, focus on products and services you feel the world just can’t live without. The Pet Rocks did well for Gary Dahl, but after Christmas he sold his remarkable trademark pets to other investors who, over 40 years later, are still waiting for the world to want their product again.

There once was a farmer who wanted to raise a turkey so he built a pen with a nice bed of straw, fresh water daily and plenty of food. He put a baby turkey in the pen and each day checked on the bird, changed its water, and filled its food bowl. The turkey loved his little place and the bigger and fatter he got, the more he bragged to the other farm animals about his wonderful life.
 
One day the farmer came to the pen to visit his turkey but this time rather than carrying a handful of feed, all he had in his hand was a sharp axe. The moral of the story is, “Past performance is no guarantee of future results.”
 
I receive regular investor fraud notices and today I read once again of a Ponzi scheme that cost retirees millions of their hard earned dollars. I commented to someone in my office about how this type of fraud has gone on for decades. I asked out loud when people will finally stop sending money to these criminals, to which someone in the office replied, “When we eradicate greed.”
 
Despite all the warnings, Ponzi schemes continue to succeed because of their brilliant marketing plan. All they require is for the scammer to get a few people to give him money, for which he almost immediately begins to send them a very high rate of return. In no time at all his investors will begin bragging to their friends and neighbors about their wonderful investment. Ignoring all red flags, others rush in to invest because they don’t want to miss out on the big profits that everyone else seems to be making. Common sense goes out the window when greed steps in to take its place. This genius marketing plan costs almost nothing to implement. Before long the scammer is syphoning off huge amounts of money, unbeknownst to the happy investors upon whom the axe will soon fall.
 
As long as there is a market for greed, criminals will continue to profit from it. If you want to avoid such schemes, begin by recognizing that an unreasonable rate of return is a huge red flag, regardless of how long a friend of yours says they have been receiving it. One of the first signs of fraud is the use of testimonials from other “satisfied” investors who themselves have been duped into being unwilling accomplices. They might be very excited about the investment because the payments keep coming into their bank accounts each month, unaware that the scammer is merely giving them other investors money, which will eventually run out.
 
Past performance can be valuable in evaluating an investment but it is only one of many factors to consider. Never use it alone as evidence of a good investment, or you may one day wind up like that happy turkey looking at the wrong end of a sharp axe. 

Saint George, Utah, is often listed as one of the top retirement cities in the country. It is one of the most beautiful places on earth, surrounded by National and State parks with breathtaking scenery. The beauty is magnified by the temperate climate with mild winters. According to the Chamber of Commerce, the city enjoys over 300 sunny days per year.
 
Every February the local home builders put on a huge “Parade of Homes” that draws nearly 30,000 visitors, mostly from colder northern cities. Many of these are looking for a warmer climate to move to. Judging by the rapid growth of the area I suspect the home builders have been very successful in their efforts.
 
As I sat to write my column this week I found myself looking out my picture window at the snow covered palm trees sagging in my backyard. An unusual cold front has come through town and for the second day has blanketed the whole valley in cold, wet snow. The home show is in progress this week and I have been wondering how our northern visitors have been feeling about the weather. Certainly mother nature is not cooperating with the home builders this year. I suspect there will be some who have come looking for a warm winter retreat who might decide to keep heading a bit further south. One such visitor even commented to me about all the “Climate change.” I wondered if they were comparing these times to some magical time in the past when the climate was always the same.
 
In meeting with clients over the past few years I am hearing more often some version of the phrase, “The stock markets have sure been volatile lately.” Even professional analysts have referred to all the recent volatility, as if there was some magical time in stock market history when everything just went up every day. I have followed the stock market since I was in high school and I can never remember a time when its movements were not volatile.
 
Stocks are much like the weather. Even though there is an average temperature, or average days of sunshine, it doesn’t mean that every week will meet the average. The volatility in the weather and in stocks averages out over time and helps you decide if it is a good place for you, but in the short run sometimes the weather and stocks just don’t cooperate. 
 
Southern Utah has wonderful weather and it would be a shame if someone missed the opportunity to live here just because they happened to show up for a home show on a rare snowy day. The stock market has a long tradition of growing wealth and providing investment benefits.  Historically the stock market ends the year up over 70% of the time. It would be a shame if someone missed out on its potential benefits just because they decided to judge it by the less common bad years, or the occasional snowy day.

I suggested last week that if you want to be wealthy you should find what the wealthy are doing and copy them. Another step in following the wealthy is to avoid those areas that diminish your wealth. Some call these the “holes in the bucket.” One of the biggest holes is created by taxes. Few people enjoy paying taxes and the wealthy go to great lengths to avoid them because they are a constant drain on wealth. One tax few people consider, is what Warren Buffet called the “inflation tax.” As I have discussed inflation with countless individuals, I have become convinced few realize how devastating its effects can be on some investments.
 
The average inflation rate over the last 100 years is slightly above 3%*, so let’s use that number for illustration purposes. What that means in real life is if you have $100 dollars today, you will need it to grow to $103 next year in order to be able to buy the exact same items. If it only grows to $102 then you technically have more dollars, but you can buy less with them, so you have lost wealth. Now here is where people get confused and where it gets really ugly from my point of view.
 
Suppose a conservative retiree averages a 3% annual rate of return.  A 3% inflation rate would eat up a full 100% of their gains. Imagine the outcry if the Federal government taxed 100% of all investment gains. Even if an investor obtained a 6% annual rate of return, the inflation tax in this hypothetical example would be 50% of total gains. Once you understand the high cost of inflation, you realize why wealthy investors work so hard to diminish its effects.
 
The tragedy of the “inflation tax” is that it unfairly punishes those on fixed incomes and conservative investors who are just trying to protect their nest egg. The less money you earn on your investments, the higher percent of your gains the inflation tax will claim. For many in retirement sitting on bank savings type accounts, the inflation tax consumes more than 100% of their gains each year. By comparison, the federal tax that we worry so much about can seem small.
 
Inflation should be right there with death and taxes on the list of things you can’t avoid. Even worse, if you earn nothing you will pay no federal tax, but the inflation tax will take its share just the same. It can be the most regressive tax we face.
 
I mentioned last week that the wealthy invest for growth while the poor seek principle protection. Unfortunately, many guaranteed investments do not even earn as much as the current inflation rate. For those investors, the “inflation tax” over a long retirement can be particularly damaging, and possibly the worst tax they will pay. If you want to invest like the wealthy, do not make the mistake of diminishing in your mind the negative effects of inflation.

The rich, the top 10%, keep getting richer and the gap between them and everyone else keeps widening. Some say our flawed capitalistic system favors the rich. Would I get bombarded with ugly emails if I suggested that the lower 90% should learn from the rich and consider doing what they do?
 
A speaker at a financial conference made a bold statement that I have considered for many years since. He said, “Rich people get richer because they invest in growth assets like stocks and real estate. Poor people stay poor because they focus on principal protection.”
 
People have told me, “I lost money in the stock market so I got out.” I sometimes display a stock market graph that shows what happened after they cashed out and say, “As you can see, you didn’t lose money because you were in the market, you lost money because you got out.”
 
In an investment chat room recently a gentleman boasted that his financial advisor had put him in an investment that “had never lost me a penny” and that he also “had never charged me a penny.” He then went on to ridicule those who put their money in the stock market.
 
I hear this comment often and I get annoyed because it is based on half-truths and a poor understanding of the products involved. Does this gentleman really believe his financial advisor is running a charitable non-profit? I have bought many cars and the salesman has never given me a bill for his services, but I have no question who is paying his salary. All financial advisors get paid, and all of them get paid by their clients.
 
The “investment” the man described is an insurance product. An insurance company’s main focus is to protect against a loss, with any potential growth being secondary to that purpose. Insurance is not an inherently bad thing. I insure my business, vehicles, house, health and life. I pay a lot for insurance and rarely get anything back, but in the event of a loss, the insurer guarantees to assume the risk. I don’t expect the insurer to make me money, just keep me from losing it. So insurance is designed for “principal protection.”
 
We all like guarantees. Who wouldn’t love guaranteed jobs, healthcare, and investment accounts? But guarantees come at a price, and it is often more than you expect. In the simplest terms, with investing you either take some risk to obtain growth, or pay someone else to assume the risk for you, and in so doing transfer away much of your potential gains.
 
So, why do the rich keep getting richer? There is no single answer but I recently studied the Forbes list of the 400 richest Americans. Not surprisingly, almost all of them listed stock or real estate ownership as the source of their wealth. Not a single one credited CD’s, guaranteed annuities or any other “principle protected” investment. They must know something that the other 90% might want to pay attention to.
 
(There is no guarantee that any investing goal will be met.  Past performance is no guarantee of future results.  Talk to your financial advisor before making any investing decisions.)

Every year I do two days of recurrent flight training to remain proficient in my airplane. During the training, the instructor will simulate potential emergencies to see how I react. For example, he may pull a few breakers causing various instruments and systems to fail. If I am able to fly the plane safely under simulated stressful conditions, I have a reasonable expectation to be able to do so in a real emergency. If not, then additional instructions will be given.
 
I’ve often thought it would be nice to create a similar scenario for investing where a portfolio could be stress tested to see how it might survive a crisis. I would also love to see how the investor might handle a challenging situation.
 
As I thought about this recently, I realized that investors were actually given a great training experience during the final quarter of 2018 when the Dow Jones Average fell about 15%. Like a simulated crisis, this market dip was an opportunity to see how your portfolio might perform in a more serious market crash.
 
So, my question is, how did you do? How did your portfolio hold up under the pressure? Did it lose value and if so, how much? If you own stocks, those positions almost certainly went down but did you have other investments that went up, offsetting the losses? By honestly looking at how you did, you will get a good idea if you need to make changes before a real crisis hits.
 
In my responsibility for other peoples’ investments I have set standards that I follow that I will share here. (These are general guidelines as individual needs will vary.) When the Dow falls, I want to limit a retirees’ portfolio downside to no more than 1/3 of what the Dow lost. So in this case that would be no more than a 5% dip. Protecting the downside, positions the portfolio for a quicker recovery and is one of the keys to successful portfolio management. On the other hand, there may be some portfolios that did not go down at all. In this case the account may actually be allocated too conservatively. For most people a portion in stocks makes sense for long term growth.
 
The other area to look at is your emotional state. If you were overly stressed during the fourth quarter that may be a sign you need to reduce your risk level. Now is a perfect time to make that assessment.
 
My annual flight training is an extremely useful tool in preparing me to be safe if a real crisis occurs. This recent market dip can also be very valuable in evaluating how your investment portfolio would handle a real disaster. Take some time to review how you did and make adjustments if needed. A real crisis will come one day and when it does, this training period will be a great benefit if you use it wisely.

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