“I Lost It All”… Really?

damaged piggy bank

I often hear people say to me, “I lost all my money in the stock market in 2008.” Or “I lost all my money in the stock market in 2001.”

Really?!  Did the stock market go to ZERO?

The facts:

In the 2008 recession, the S & P 500 dropped over 37%.  Not quite all the way to zero, but it did drop 36%.

But remember, markets temporarily go down and permanently go up.

In 2009, the S & P 500 was up 27%.  In 2010 it was up 15%.   You had all your money back in a couple of years.

In 2001 the S & P dropped 12%, and went down 22% more in 2002.   It then increased 29% in 2003 and 11% in 2004.    It took about 3 years to get all your money back.

So, how are these people “losing all their money?”

What they really should be saying is:

“I got some hot stock tips from my neighbor.  I then went ahead and started day-trading those stocks.  I was really good at it!  Then the stupid economy tanked and my stupid account ended up at zero.”

Or they should really be saying:

“I invested $100,000 in a hot, 5-star mutual fund that focused on startup tech companies in China.  Then the market crashed and I lost $70,000!  There was NO WAY I was going to lose any more.  So I pulled all the money out.  I have been getting .001% interest on the money ever since.”

That is what actually happens.

People that have well-diversified, balanced portfolios are not going to lose all their money.

Next time your neighbor or Aunt Jenny tells about how they lost all their money in the stock market, don’t let it infect your own thinking.  You don’t have the whole story.  And not knowing the whole story can be harmful to your financial health!

Here is the scenario:

Let’s look at every 20 year period between 1955-2015.

Meaning: let’s look at 1955-1975 and then 1956-1976 and then 1957-1977…etc.  All the way up to 1995-2015.

So during those 20 year periods, let’s say someone had $500,000 and starting taking out $25,000 per year (or 5% of the original amount).

Also, they increased the amount they took each year by 3% (for inflation).  So the first year they took about $25,000 and the second year they took out $25,750…and by the 20th year they were taking out $45,152 a year.

Let’s say that these people had 100% of their money in the 500 largest U.S. companies (the S & P 500 Index).

So the question is:  how many of those 20 year time periods would have resulted in this investor running out of money?

Remember, during each of these 20 year period, they took out a total of $737,064 from their account.

Did they run out from 1966-1986?  Did they run out, using these assumptions, from 1990-2010?

So I looked at every permutation (all 36 possible 20 year periods).

How many resulted in the investor ending up with an account balance of zero?

The Answer:

None.  Not once.  Every time they had money left over.  Every.  Single.  Time.

 

 

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The value of fixed-income securities may be affected by changing interest rates and changes in credit ratings of the securities.

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