The stock market ended up returning over 30% in 2019. The bond markets were up 9%. A portfolio containing half bonds and half stocks returned around 20%. Wow. Wow. Wow.
Now if the markets go down 10% next year, you are NOT allowed to freak out. You will simply remark, “I’m just losing some profits from last year. No big deal. These things average out over time.”
Next year the markets could soar again. There is just no way to know. You need to continue to trust the process and reap the gains.
I hear the same refrain nearly every day from people that I meet, “Dave, I don’t want to invest in the stock market because I don’t want to lose all my money like in 2008.”
While I empathize with their concerns, this week I wanted to help give some historical perspective on the history of market volatility. As I mentioned above, when the stock market is expanding the rewards can be incredible.
But, Baby Boomers, you (and your money) have been through a lot.
The Retirement Revolution’s entire premise is based on the idea that once you retire you need to have your money working for you. Your money needs to be producing income because you no longer are. Baby Boomers have so many factors working against them when it comes to financial peace in retirement, and the 2000’s certainly didn’t help.
Many people in their 60s, 70s, and 80s have very strong emotions attached to the stock market because they lived through two of the worst recessions in U.S. history. From 2000-2002 the stock market struggled, and of course, 2008 was the worst recession this country has seen since the Great Depression.
All of this sets Boomers up for failure as it pertains to their investments. I am going to argue today that you may have a skewed understanding of market crashes.
Learn from financial history; don’t live in it.
Imagine you were retiring in 1995. There had not been a major recession since the early 70’s. The stock market had been chugging along, uninterrupted for nearly 20 years. While there was a large single-day crash in 1987, the market recovered completely by the end of the same year.
If you were retiring in 1995, you probably would not have the same fear and trepidation as you do today. “Of course I’m going to invest my money, it’s been a great way to grow my net worth for years and years.”
Imagine you were retiring in 1965. The economy had not experienced a major recession since the early stages of World War II in 1940. Same story. It would have been much easier to make smart, unemotional investment decisions.
Now as people plan for retirement, many have a mortal fear that they could wake up one day and find that the markets had crashed and all their money was gone.
Let’s start with a “worst-case scenario.” A retiree who had had their money in a diversified portfolio of stocks and bonds, in 2008. The recession hits. The common assumption is that the retiree lost everything.
The reality? Somebody who had 50% of their money invested in bonds and 50% in stocks would have lost 15.88 percent. That would sting, but it wouldn’t ruin you. (Source: New York University, Stern School of Business)
Let’s time jump to 2009. Same retirement portfolio referenced above made +16.2 percent (this is just a coincidence but it’s really cool). The concept that people “lost all their money” in 2008 just isn’t true.
If you had all of your money in Tyco stock or Enron stock then, yes, you would have been in big trouble. But a diversified and balanced portfolio of stocks and bonds fared far better than most people realize.
Two stock market crashes in a single decade like 2001 and 2008 is exceedingly rare. The only other example would have been during the 1930’s during the Great Depression and the start of World War II. Could we go another 60 years without a bad decade like that again? I don’t know, my crystal ball is in the shop.
But it has happened before….
A 50/50 portfolio of stocks and bonds (besides 2008) has only lost money 4 times in the past 43 years.
Reality, not fear, should guide your investment strategy.
I want to repeat that fact. In 43 years, a balanced and diversified portfolio of stocks and bonds has lost money 5 times total. And 4 of those times were -6 percent or less! The concept that “you may lose all your money” just has no historical precedent.
By the way, this very same portfolio returned an average of +10 percent during that 43 year period. $100,000 invested in 1975 would have been worth over $5,000,000 today.
I hope this helps. Don’t let one bad decade sour you from investing. Stocks and bonds are incredibly powerful financial vehicles that have hundreds of years of history behind them. And even if we have another bad decade like the 2000’s, you will still probably be okay.
In fact, if you invested $100,000 in 2000 into the portfolio referenced above, you would have been left with a mere $145,000 in 2010. And that was the BAD decade.
Be encouraged. A well-diversified portfolio can support you and your loved ones throughout your retired years. Don’t let fear get in the way of good, solid planning. You deserve to live an empowered and fearless retired life!