Dave Kennon, Kennon Financial
I figured with all the volatility in the market right now it’s a good time to review some essential investment knowledge. Let’s go to class. All data is taken from New York University’s Stern School of Business. (source)
1. Most people nearing retirement do not have all of their money in the stock market. This is one of the most common misconceptions I run into each week. Remember, a well-diversified portfolio contains both stocks and bonds.
Why is this important? Because in modern economic history, stocks and bonds have never gone down in the same year.
Most of the time, the more stocks go down the more bonds go up. This is mainly due to the fact that people panic and move their money into more conservative investments.
For instance, in 2000 the stock market was down 9% and the bond market was up 16%. In 2002 the stock market was down 22% and the bond market was up 15%.
So if half of your money was in stocks and a half in bonds, the effects of the market downturn would have been greatly diminished.
2. It is NOT timing the market, it is TIME in the market. It is absolutely impossible to time the market. Moving in and out of your investments is a recipe for disaster.
According to Dalbar, in the past 30 years, the stock market has returned a little over 10% on average. What is the average return of an actual person who invested in the stock market? 4%
How is this possible? Human beings are emotional. They pull in and out of the markets. They let their emotions determine financial decisions. Don’t make the same mistake.
4. If the stock market between now and the end of your life does not return an average of at least 5% per year it is the time in modern economic history where it hasn’t.
5. Without the power of stocks in your portfolio, it is going to be very difficult for your money to grow enough to keep pace with your lifestyle. Keep your eyes on the prize!
6. Warren Buffett says, “Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
7. The markets are never “due” for a correction. It is not that simple. Sure, in the 2000’s we had two serious recessions in 2001 and 2008. Now we are ten years without a downturn. We are due, right?
From 1941 to 1973 there were no “crashes.” From 1973 until 2001 there were no “crashes.” Don’t assume the markets are on some sort of set-in-stone crash cycle.
8. 2008 was a “worst-case-scenario” type of year. Someone with half of their money in bonds and a half in stocks would have lost -16%. In 2009, the same portfolio returned +16%.
9. Stocks and bonds have 200 years of success. Don’t try to reinvent the wheel.
10. We live in the most affluent country, with the most social safety nets, in the most exciting time in all of human history. You are not going to end up as a Walmart greeter living in your car. Even the poorest Americans are far better off than almost every other human being on the planet.
Dave Kennon, Kennon Financial