Importance of Financial Defense

The great Alabama coach “Bear” Bryant once said, “Defense wins championships,” and you can bet that almost every great coach in nearly every sport has shared that same philosophy. Just think about some of the great sports dynasties, teams that won championships year after year: the Green Bay Packers under Vince Lombardi, the Boston Celtics under “Red” Auerbach, or the Yankees under Joe Torre. The list could go on and on.

All these teams knew how to score, yes, but they all started with the premise that a strong defense made their offense better. Strategically, they knew how to win games, but they focused first on strategies that ensured they wouldn’t lose games.

Why is that same approach so critical when it comes to your finances and — in particular, saving and investing for retirement? It’s simply because when you’re talking about your “life savings,” losses can potentially have a huge impact on your life! How huge? Well, consider the fact that if you have all or most of your investments invested for growth in the stock market and your portfolio loses 50% of its value, you will need to regain 100% of it to break even. That takes time and depends on whether the market keeps growing or drops again.

The fact is, this very thing has happened to domestic investors in the US twice since the year 2000. From the beginning of 2000 through 2002, the stock market, based on the S&P 500 Index, dropped almost 50%. It took until October 2007 to recover. That means it took approximately two years for the market to drop by nearly 50% and then five years to make a 100% gain and get back to where it was some seven and a half years earlier. Then, lo and behold, it dropped again when
the Financial Crisis hit. This time, it took roughly seven years to recover to its previous high. So, there have been two drops of around 50% or more and subsequent rebounds since the turn of the century.

Time is Money
So, let’s go back to the question, “how huge” was the impact of all this on investors unaware of the importance of financial defense? To gauge the full impact, we need to look further than the fact that these investors twice had to re-double their lost gains with virtually no portfolio growth; we also need to consider the amount of time that elapsed.