…and it’s driving me a little nuts.
You know what they all agree on. “You gotta be in stocks if you want to have retirement money.”
Even now. In every finance magazine. “You gotta be in stocks… In the long run, that’s the place to be.”
With that little tiny “Past performance does not assure future performance” footnote that they don’t want you to hear.
And I find myself saying “In the long run, we’re dead.”
[There's a good question for any of the Big Name Personal Finance Experts spouting this standard advice: What percentage of your savings/investments are in stocks? In one hotshot's case, the answer is apparently 3%. Which is really telling...]
A little thought experiment
Let’s say that, in 1997, you had $100,000 to invest toward retirement. Let’s say you were 45.
You could put it in CDs or something like TIAA. Let’s say that, over the years, you could average 5% APY (finding the right CDs–with TIAA, you’d be doing better than that).
Or you could put it in stocks–let’s say something like an S&P500 index fund.
Where are you now? Unless I’m misunderstanding something, if you made the stupid, dumb, shortsighted, only a fool would… choice, you’d have about $180,000 (at the end of 2009, at least).
Where if you’d made the Only Good Choice, you’d have…$100,000.
Ah, but In The Long Run Stocks Always Win.
So let’s project that out from now, assuming (and wouldn’t it be a lovely assumption!) that they’re not going any lower.
Here are the points at which the mutual fund Smart Guy would finally pass the CD-holding Dumb Guy (assuming essentially 0% management costs):
If the market averages 8% per year: 2031.
If the market averages 9% per year: 2025.
Now if you’re a True Believer and bet that we’re never, ever going to have any economic problems after, oh, next week, you might go for higher average yields.
If the market averages 10% per year: 2022
If the market averages 11% per year: 2020.
Realistically, for these two people who were 45 in 1997 and counting on using that retirement income starting in 2017…well, at that point, the Dumb Guy’s still looking pretty good.
And if it’s 2011 before the market is as high as it was in 1997?
Then…well, then: 8% yields 2036 as a crossover point–27 years from now!
9% gets us to 2030, at which point our mythical 45-year-old is a mere 78 years old.
Even 10% doesn’t yield crossover until 2026.
Maybe they’re all right about the long run…
But it does make me wonder.
- I am not a financial planning advisor of any sort.
- This is not advice. Period.
- I could be entirely wrong. I could be missing huge, major factors.
- All this is is a grumpy little thought experiment…
Update, February 25: As John Mark Ockerbloom points out in the first comment, this thought experiment oversimplifies, at least for mutual funds covering the broad marketplace. It fails to take into account dividends (for those stocks that have them) and management fees. Ah well, it was mostly a grumpy little thought experiment.