Financial experts all agree…

…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.

6 Responses to “Financial experts all agree…”

  1. It sounds like you’re just considering the market averages, which reflect share prices. To evaluate investment in stocks, you have to consider dividends as well.

    For instance, at the end of February 1997 the S&P 500 was 790.82, and today it’s 773.14. That’s more than 2% lower than it was in 1997, and that’s not even taking inflation into account.

    But let’s say that you bought a CREF stock fund unit at the end of February 1997. It was worth 114.0259 then; it’s worth 135.4558 now. So instead of a loss of more than 2%, you have a gain of more than 18%.

    That reflects both the boost from dividends, and the drag of management fees. The difference isn’t due to stock-picking either: CREF’s equity index fund, which buys stocks on autopilot, also gained a little over 18% in the same time period.

    Mind you, that return still ends up being less than 2% per year, which still is not a good return, especially when you then account for inflation. A purchase of a TIAA unit in 1997 would have gained you more by now than an equal-valued purchase of a CREF unit then, no question, since this past 12-year interval has not been a good one overall for stocks. But you need to compare returns to returns, not returns to share prices.

  2. walt says:

    John: You’re absolutely right. For mutual funds that cover the broad market and have low management fees, my thought experiment is faulty. Thanks for pointing that out.

    (Now, as to the more aggressive financial advisers, who would have people in “growth stocks,” many of which don’t pay any dividends…well, that’s a different situation.)

  3. Yes, I agree that much financial advice leaves much to be desired, and certainly you shouldn’t have a lot of funds that you expect to tap within the next few years in stocks, in any market. I’m hoping not to tap my retirement accounts for another couple of decades at least, so I’m fairly comfortable putting most of my current contributions into stocks, especially since they’re now no longer at inflated valuations on average. But I still go “ow” when I see that my total contributions have lost value overall since I started my accounts.

    TIAA-CREF and Vanguard both seem to be fairly good at recommending basing allocation in part on age or other investment horizon. But I think they could have given better advice in terms of adjusting allocations based on general market conditions: that is, buying fewer stocks when their valuations are high by historic standards and more when their valuations are low by historic standards. (They sometimes seem to be discourage this as “market timing”, but on the coarse-grained level, with a long-term horizon, I don’t think it is. You’re not trying to figure out *when* the big drop or rise will be, you just are pretty sure one is coming at some point, and you’ve got time to wait for it.)

    I invested somewhat conservatively based on the usually recommended age formulas, so I didn’t get hit as badly as I might have in the current downturn. But I think I could do better if I adjusted more aggressively to the deviations from average than I did. (And they work both ways; in a major recession, stocks often come roaring back at short-term rates much higher than 10 percent, and often do so before the economy as a whole fully recovers.)

  4. walt says:

    John: You’re probably quite a bit younger than I am. (I’d be legally required to start dipping into retirement funds in 6.5 years, and probably will need to do so before that.)

    No great disagreement here–mostly just frustration at the overall advice and failure to note that, well, there really is no guarantee that “often” means “and will continue to do so”…

  5. This is something I’ve been thinking and writing about as well. Libraries as institutions, and librarians as individuals, tend to be pretty good at taking a long-term view. We also tend to be responsible stewards of our funds, and we’re generally pretty skeptical about puffed up promises.

    And yet…

    Perhaps it’s because we don’t have as much of a margin for error as people who make more than we do. If I ever manage to save enough to live on for the rest of my life, I’ll probably reduce my stock holdings to something like 3% as well, because at the point my only goal would be capital preservation. But on a librarian’s salary I’m very unlikely to ever have that much saved.

    And so I’m doing what the people who I believe are the most trustworthy experts in the field suggest. I have the percentage of stocks (divided between US and non-US) , bonds, real estate, and cash that’s appropriate to my age and risk tolerance.

    I don’t enjoy looking at my statements any more than anyone else does, but it’s a truism that most people sell when they should be buying and buy when they should be selling. Markets turn suddenly and unexpectedly. You do the best you can, blow off steam in conversation, and follow the best advice available.

  6. walt says:

    Well, I’m not suggesting what anybody should do.

    Of course, in 2036, I’ll be 91 years old (if I’m still around), so the combination of age and risk tolerance is pushing in one direction anyway.