Financial advisors are obsessed with preventing drawdowns instead of focusing on long term returns. Your priority should always be on long term returns. But what about corrections? Don’t they reduce my retirement savings? No! Long term returns include the drawdowns. Drawdowns aren’t a loss unless you sell. Your financial approach should be buy and hold.

Lost opportunity costs are the cost of not being invested all the time or of being invested in something with a lower return. Lost opportunity costs are normally the greatest risk you face. Why? Lack of diversification is normally not a serious risk because diversification causes you to own investments that have lower returns. Getting rid of them increases your performance.

Once you have a lost opportunity cost you can never regain it later. It is gone. Financial advisors don’t talk about lost opportunity costs because they don’t know of opportunities with greater returns. Most of their suggestions have returns below the S&P. If they were to consider lost opportunity costs they would have to recommend putting everything in the S&P since they don’t have a better alternative.

The Stars model has a relative performance over past 14 years of 19 percentage points per year above the S&P. The average investor is 5% below the S&P. Therefore there is a 24 percentage point lost opportunity cost every year you are not in the Stars model.

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