To add insult to injury, inflation during that period averaged 2.3% per year, which means the real (inflation-adjusted) performance of the broad market remains negative after sixteen years. This doesn’t account for dividends, but it also assumes you have no fees, commissions, or taxes—not gonna happen!
YOUR RETIREMENT “PLAN” POWERED BY WALL STREET: 16-YEAR ANNUAL GROWTH RATE OF THE S&P 500 INDEX
Furthermore, most people we’ve surveyed believe there will be another major stock market crash in the next five to ten years—or even sooner. Maybe you’re in that camp, too. If you have most of your retirement savings in the stock market, how would another crash of 50% or more affect your retirement security?
How Long Does It Take the Stock Market to Recover?
Since 1929 we’ve had three market crashes where the Dow took between sixteen and twenty-five years to return to pre-crash levels.
After the stock market crashed in 1929, there was a six-month sucker rally, then the Dow continued tanking. Ultimately the Dow took three years to bottom out—dropping a staggering 89 percent! Then it took twenty-five years just to return to its pre-crash level.
Could something like that happen again? I don’t know and neither does anyone else, including all the talking heads on TV and in magazines and newspapers. That’s the problem. Too many of us have pinned our hopes for financial security on things we can’t predict or count on—and we never could and never will be able to.
So the big question to ask yourself is (in the immortal words of Dirty Harry): “Are ya feelin’ lucky?”
Can you imagine the impact on your own retirement plans and current lifestyle if you had to wait twenty-five years for the market to recover?
Can you imagine the impact on your own retirement plans and current lifestyle if you had to wait twenty-five years for the market to recover?
Here’s a revealing way to gauge your tolerance for market risk: What is the minimum acceptable annual return you’d want to get that would make you willing to stomach the nerve-wracking volatility of the stock market? 7 percent? 10 percent? Maybe even more? I’ve surveyed thousands of people, and almost everyone says they wouldn’t go through the agony if they got only 5 percent. But even if you only insisted on a 5 percent annual return, the Dow would have to be over 35,000 right now—today—to have given you that return, after adjusting for inflation. No, that’s not a typo. For proof, go to http://www.bankonyourself.com/why-you-need-dow-35000-today.html.
How long do you think it will take for the Dow to go to 35,000?
Investors Are Predictably Irrational
What will happen in the stock market isn’t predictable. But one thing is absolutely for sure and for certain: Investors are predictably irrational. We’re not talking smart or stupid, sophisticated or naïve. We’re talking across-the-board irrational.
So maybe you’re thinking you can handle the volatility of the market by just gritting your teeth and praying everything turns out all right as you roll the dice in the Wall Street Casino. Or maybe you think that at the first sign of trouble, you’ll be able to bail out of stocks and into bonds or money market funds to lock in your gains.
Unfortunately, that’s not what’s happening. History shows that most of us are far more successful at locking in our losses than our gains. Since 1994, DALBAR, Inc., the leading independent, unbiased investment performance rating firm, has studied the actual long-term results investors get in the market. In the 2015 Quantitative Analysis of Investor Behavior, they concluded:
• Over the last three decades, the average equity mutual fund investor has earned only 3.79 percent per year, or about one-third of the return of the S&P 500—beating inflation by only 1 percent per year. (Was that worth the roller-coaster ride and sleepless nights?)
• Investors in asset allocation funds (which spread your money among a variety of asset classes) earned only 1.76 percent per year, and fixed-income fund investors (like those in conservative bond funds) earned less than 1 percent per year for the past thirty years!
Shocking, isn’t it? But if you’ve noticed your investment accounts aren’t rising at the rate of the market, you recognize the truth of those numbers. How is it even possible for so many people to underperform the market indexes like that?
The verdict is in: DALBAR, Morningstar, and the behavioral finance experts confirm that the majority of investors consistently buy and sell at the wrong times. Sound irrational? Well, we’re human, and we humans make emotional decisions driven by fear (survival) and greed. But as financial writer Brett Arends warns us, “You can’t buy low and sell high if you buy high.” And that’s exactly what too many of us do.
The verdict is in: DALBAR, Morningstar, and the behavioral finance experts confirm that the majority of investors consistently buy and sell at the wrong times.
What’s Your Money IQ?
Q: What percentage of mutual funds, financial advisors, and investment advisory services underperform the overall market? And why?
A: 80 percent, according to the Hulbert Financial Digest. And it’s not just because of the fees they charge. It’s because all the experts are human, too, and are predictably irrational like all the rest of us, buying and selling at the wrong times.
In his book Predictably Irrational, behavioral economist Dan Ariely talks about how we human investors typically forget about our losses and mentally exaggerate our successes. (You gotta love the name of the institute Ariely co-founded: the Center for Advanced Hindsight.)
Are You the Dumb Money?
How many times have you sworn you’re done with the stock market forever? But then the market starts to rise. The Wall Street jocks tell you nonstop what you’re missing out on. Your friends talk about how much their investments are going up—and you jump back in because you can’t stand the pain of watching it rise day after day without you!
“In investing, the majority is always wrong.”
—Wall Street adage
I heard a well-respected investment analyst interviewed about why he believed the stock market rally still had legs in spite of the fact that it had recently nearly doubled. (By the way, students of history will tell you how rare it is for a market to continue rising after such an extraordinary rally—only a handful of bull markets in S&P 500 history have gained more than 100 percent.) He said, “People who missed out on the rally will jump in and propel the market higher.” Really? Have you heard that old saying, “If you’re sitting at a poker table and you can’t figure out who the sucker is, it’s you”?
The investing world has a specific technical term for that kind of investing: dumb money. When the dumb money is piling into the market, you know it’s about to reach a top. And when the dumb money is fleeing the market, a bottom isn’t very far away. Dumb money, which is a heck of a lot of investors, misses the mark on both sides.
What’s Your Money IQ?
Q: According to Morningstar, Inc., the top-performing mutual fund for the decade ending December 31, 2009, enjoyed an 18 percent annual return. However, the typical investor in that fund wasn’t so fortunate. What annual return did the typical investor get in that top-performing fund and why was their return so different?
A: The typical investor in the best-performing mutual fund of the last decade lost an average of 11 percent per year, every year for ten years,