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Tuesday, March 13, 2012

Don't Blame the Stock Market!

Not surprisingly, financial market reporters have hammered home the idea that the 2008 stock market played a big role in destroying the retirement goals of many.  No doubt it did for some; but these were, for the most part, those who don't know how to invest.

In After the Storm. the Little Nest Eggs That Couldn't, Steven Greenhouse quotes Jonnie Worth who says “Like everyone else, I watched my retirement savings plummet” .  “I lost a big percentage of my investments.” She worked at JP Morgan Chase - a place where one would think that good investment advice was available.  Anyways...let's think about Ms. Worth's situation.  In the latter half of 2007, the stock market reached its all-time high - worth noting.

In 2008, of course, stocks plummeted.  A well-diversified portfolio invested basically 65% stocks/35% bonds was down 22.6% for the year.  By the way, this allocation is more aggressive than most near- retirees would choose.

Granted, those who sold out during this period locked in a loss.  If it was panic selling, they probably didn't get back in.  Ms. Worth is likely in this boat, with others.  Again, this isn't investing - it is market timing, etc.  It's watching the dice roll and trying to decide when to place a bet.  This is fodder for behavioral finance experts.

Investors, on the other hand, continued to contribute to their 401(k) and other investment accounts.  Some increased their allocation to stocks on the grounds that it was the sale of a lifetime.

How did an investor do who stayed the course?  By the end of 2011, the diversified portfolio mentioned earlier was up 7.2%!  This doesn't account for contributions during the period - it is just the value of the portfolio assets from the beginning of 2008! I t also doesn't take into account the push higher we've seen in 2012.

The bottom line is simple.  Most retirement assets should be invested in line with a well thought-out asset allocation model that can weather not just calm seas but stormy ones as well.  If you can't emotionally do this, hire an advisor to do it for you.  If you have an overwhelming desire to gamble, limit it to 20% or less of assets.  You or that advisor with the great track record might be the next Warren Buffett, but (I hate to be the one to break the news!) probably aren't.


  1. Good advice Robert! Emotions, not IQ determines how well your investments will do.

    Stay the course and tune out the noise.

  2. Whenever I get a little squeamish and frightened by the market, I look at the historical long-term trend lines which are up...... even in the worst of times the market has bounced back.... all it takes is time and patience.

  3. Honestly - 7% over the period of 4 years? What is it, on average - 1,5 a year with a chance to loose it all?

    2011 - does not count - S&P 500 ended the year of 2011 within 0.01% of where it was at the beginning of the year.

    I do believe that risk investing in the stock market is not compensated enough anymore. You would be better investing in bonds in short term. Why in the short term?
    Most likely after presidential elections stock market will plummet and inflation will be raging.

    It would be a good move to go in to property market with fixed interest rate for the next 20 years : -)
    If I would be 20 years old I would not invest in the property market now.

    1. If you feel that way about stocks you definitely have a low risk tolerance and should not be in stocks. My feeling is that stocks will lead the way over the next 20 years and investing in bonds at 2% yields will really hurt retirement portfolios. A little over 20 years ago the internet was unknown. Cell phones were non-existent. Nobody had a PC on their desk. Those who participated in the stock market did very well. What great new innovations are forthcoming?

  4. There are lots of things that destroyed the nest eggs of many including: both individual and corporate greed, individual and corporate ignorance, not following investment fundamentals, insufficient preparation, etc. I could go on, but suffice it to say that the etiology was multi-factorial. As you told me last year, those in the media are not going to list all of the reasons/rationale/justifications for their statements, nor do people really want to read/hear a "gray" story: they want it "black or white."

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