Posted in Money Mondays
Was it really a lost decade for investors? Let’s say you’re in your early 60’s and you’re getting ready to retire. You’ve been working for four decades, and saving steadily for your retirement for the last three of them.
Well, unless you stashed all your retirement savings into cash and then had the great misfortune of investing it all in the stock market on November 9, 1998, it probably wasn’t really a lost decade for you. Oh, and did I mention, you would have had to have the greater misfortune of picking all individual stocks that paid no dividends. But yes, if you did exactly that, it has been a lost decade. Raise your hand if that scenario applies to you.
Now, for the rest of you that dollar-cost-averaged into stocks over the decades of your working years, find the year in which you started investing on the chart above. Draw a line across the chart beginning from the stock market level for that year--for me that's 1990 (the lower line beginning at 1990).
Here’s a picture of how much money you have made. The gray area between the two lines is how much money you’ve made, the gray area above the red line is the money you lost (shares you purchased at a higher value than they are today), at least on paper. For those that have been disciplined investors for two, three, or four decades, the gray area between the lines is greater than the gray area above the red line. You came out ahead. Way ahead.
It certainly has been a rocky ride this last decade. But including some stocks in your retirement nest egg is still the only way to be sure you’ll be able to keep up with inflation. “You can’t get to a retirement goal earning 2% or 3% in bonds when inflation is running at 3.5%,” Jeff Layman points out in this recent Market Watch article, Why Stocks Will Save Your Retirement. He goes on to warn that over time, inflation is more devastating to a nest egg than “periodic rounds of volatility.”
It can feel safer these days to stash all your money in cash, but “don’t confuse certainty with safety.” According to money manager Harold Evensky, that approach is “very unlikely to be safe for most investors because there’s not going to be enough money to pay the bills after you factor in inflation.”
Clearly it would be most lucrative to sell all your equities at each peak and buy them all back up again at each bottom, a very hard strategy to implement. The data cited in the article shows that most individual investors tend to sell as the market is tanking, and then miss out on the rebounds. From 1991 through 2010 this behavior reduced the average equity investor’s return from the 9.1% of the S&P 500 during that time, to a paltry 3.8%. Kids, don’t try this at home.
The safest approach is still to figure out your own risk tolerance, create an allocation among diversified assets that will allow you to sleep at night, shop for funds with low expenses, and most importantly, automate the buy-low, sell-high process by rebalancing your assets regularly.
This is a post from Retirement: A Full-Time Job. Subscribe—it’s free (plus it makes me feel good.)