Losing Money By Not Losing Money

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 Great Recession, the S & P 500 dropped over 37%.  Remember this was a historically bad recession.

Never forget: markets temporarily go down and permanently go up. You had all your money back in a few years.

In 2001 the S & P dropped 12%, and went down 22% more in 2002.   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, new stock focusing on crypto-currency, and then the stupid thing crashed and I ended up with nothing.”

Or

“I had all of money invested in company stock in my 401k and the stupid company went out of business.”

People who possess a well-diversified, balanced portfolio are not going to lose all their money.   For those who hang in there, it is just not a realistic possibility.

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

In the same vein….

In the past week I have had three separate people say the same thing to me.

“I kept my money in cash since the 2008 crash because while I understand I’m not going to MAKE any money- at least I’m not going to LOSE any money.”

After the first person told me this, I thought to myself, “I guess that is reasonable.  At least they feel safe and secure.”

After the second person, I thought to myself, “I guess that makes sense, but is this really a rationale and logical way to approach this situation?”

After the third person, I thought to myself, “But you ARE losing money.  You ARE losing money!”

You are losing money in three different ways.

  1. While you may be eliminating market risk, there are other risks at play here. Inflation risk is a very real issue.  If inflation is increasing the price of goods and services by 3% per year and your money is making 1% per year, you are losing 2% per year of purchasing power.
  2. You are also exposing yourself to opportunity risk. If a balanced portfolio of stocks and bonds were to return 10%, you just LOST 10%.  Just because you didn’t see a red “minus” next to your account number, doesn’t mean you didn’t lose money.
  3. The biggest risk you face in retirement is “longevity risk” which is the risk that you are going to live much longer than you expected. You money needs to keep growing, period.  You can’t rely on a 2% CD.
  4. Here is a real gut punch to anyone who moved their money to cash in 2008.  $100,000 invested in the stock market in early 2009, is now worth $412,000.  That means you LOST $312,000. There is no other way to look at it. That is a much larger loss than the actual crash itself.

Ironically, if your money is “safely” working for you during your retired years, you could be dramatically increasing your chances of running out of money.

That’s right.  People who are trying to protect themselves from running out of money might run out of money by trying to protect themselves from running out of money (wow, that was a weird sentence).

Be Blessed,

Dave 

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