Chatting About Investments at Lunch
Dec 22 2011
I’m sitting in a restaurant for lunch and two people at the table next to me start talking about investing and their 401ks. True story.
I’m not good with ages but they were 30ish give or take. Their firm just stopped the company match on their 401ks. Here’s the short version of their discussion:
- Company stopped the matching contributions.
- Their account values are down and they can’t get ahead.
- They are tired of the up and down turns in the markets.
- The economy is in the dumper.
- They would rather put their money somewhere with consistent growth.
- Maybe they should pull their money out of the 401k and use CDs.
As much as I was moved to say something to them, I didn’t. I have no problem minding my own business…really! Besides, to properly address all their issues would have taken the whole lunch time and more.
What eventually struck me was that for their age, they have only known the flat market we’ve been in since March 2000. Check out a stock chart using the DOW Index from Jan 2000 to now. Notice how we have hovered above and below the 11,000 level. No wonder their opinion of investing was sour. The younger investors of today need some perspective.
The flat market over the last dozen years is normal. Flat markets happen; now, 1966-1982, 1946-1950, 1905-1917 and so forth. The flat markets happen after periods of strong growth and they tend to last a while as you see. They provide an opportunity for the economy to cool off, retool and resynchronize as we, the country and world, prepare for the next round of growth. Unfortunately to someone who’s only investment experience is during a flat market, the investment world is flat. Have no fear younger investors, the world is not flat.
Our human brains focus best in today’s world. What’s going on today forms our opinions and how behave with our money. At the end of every day, we are told the DOW is up or down. The evening news talking heads always spin the down days as though we all lost our shirts. On the good days, we’re rich! Then we take action based on information from this very limited perspective–action doomed to fail.
Investors must use a long term strategy. In the short term, the markets are up and down and random. Only speculators try to make money in the volatility of the short term markets. True investors see a bigger picture. The stock market is up 72% of the time over the long haul. Looking at it this way, realize that down markets are temporary and must be exploited before the inevitable climb upward starts again.
My individual IRAs were worth $150,000 before the crash of 2001, not bad for saving to the max for a little over 10 years. Having endured the crashes of 87 and 94 I thought it no big deal. Well I’m now 56 and it’s a really big deal to say the least as my IRAs are now worth $70,000. What happened to the rule of 12s? And what does it matter what the market is worth if your financial advisor doesn’t perform (but of course still gets paid). Whose side are these guys on anyway? I’m on my third advisor and I again lost 20% in 2011. Sorry, but if I had to do it all over again my money would be in Credit Union CDs. That’s a boat-load of money down the toilet!
Shane’s observations are worth sharing with a lot of young, and some who are not so young.
Sound observations like this don’t have the sparkle and excitement that we can see from “pumpers” like Cramer and some other TV shows.
Our Service personnel who do make an effort to learn about finance from TV and publications like Money magazine see all manner of glitzy advertisements and rarely realize that, unless they buy an index fund (e.g. Vanguard), and especially when the market is in the doldrums, they will be paying a significant percentage of any modest gain to the fund management (e.g. Fidelity, Gabelli). If their fund is losing money, they will still be paying for management even as it facilitated any losses.
It is a small, but important part of our obligation to encourage our Service people to take advantage of the USG’s Thrift Savings Plans and other assists when they can.
Unfortunately, there are too many out there – payday lenders, some car dealers, etc. – who are happy to take advantage of our Service people, and their families.
My comment is not necessarily directed toward the current article, althouigh is related to investing. The article (and highlighted web address, below) might have some interest to pesons managing their own stock portfolio in their retirement accounts. I highlighted the web address – not all highlights will lead you to the website. If it does not, use “presidential elections and stock market cycles” with a Google search. Look for Pepperdine.edu in the web address. This is one of those articles which has no ‘axe’ to grind which seems to give it more credibility.
Robert L. Bowers, Jr. USAF Ret.
http://gbr.pepperdine.edu/2010/08/presidential-elections-and-stock-market-cycles
Thanks for the perspective, Shane. I’m one of those in their mid-30′s who don’t really look at it as *flat* per se, as it seems much more like a series of bubbles (tech boom/bust of 00′s, housing boom and bust of ’01-08, gold boom and bust of 05-12?). Sure, flat on average, but far from uninteresting.
I’ve been trying to plan for the long term by looking at historic geometric real return- that is, the return you can expect from investment after inflation (slightly more complicated, but I’ll leave it at that). I came across a document (www.ssab.gov/publications/…/estimated%20rate%20of%20return.pdf) authored by Campbell, Diamond, and Shoven in 2001, who were estimating geometric real return for the foreseeable future. The all agreed that historical geometric real return from the early 1900′s to present is about 7.0%, while Diamond said that we couldn’t expect that kind of return to continue in the future, and predicted a smaller return of 4.0-4.5%. The following paragraph, though is particularly interesting, given the last ten years of stock market performance:
“In considering the prospect of a near-term market decline, the Gordon equation can be used to compute the magnitude of the drop required over, for example, the next 10 years in order for stock returns to average 7.0 percent over the remaining 65 years of OCACT’s projection period (see Appendix B). A long-run return of 7.0 percent would require a drop in real prices of between 21 percent and 55 percent, depending on the assumed value of adjusted dividends (Table 3). That calculation is relatively sensitive to the assumed rate of return, for example, with a long-run return of 6.5 percent, the required drop in the market falls to a range of 13 percent to 51 percent.”
This may indicate a return to historical rates (or close to) in the coming years, given that market performance has faltered significantly (though I’m not sure to the degree that Diamond required to make the higher prediction for future performance).
Understanding “prior performance is no guarantee of future performance,” very interesting recent news that, in fact, BONDS HAVE TOPPED STOCKS OVER LAST 30 YEARS…
What is your definition of a “temporary” down market, 2 years 5 years? It seems to me that the massive amount of Government debt (both here and in Europe) is going to result in an incredible drag on growth for at least the next 5 years, if not longer. This is frightening for those of us over 60 as we don’t have the time to re-grow our retirement. I am seriously considering pulling the majority of my money out of stocks in order to preserve what i have now rather than suffering through the volatility which I think is inevitable over the next several years.
The “flat market” led me to diversify and not believe the “excellent rating” put out weekly by Value Line. Money placed in large, good companies paying 3.+% dividends has been a winner for me. Research prior to investment is mandatory if you desire to come out ahead. Forget 10% annual growth. Be happy with 5% growth and elated with 7.5% annual growth.
PHH
Agree with many of you but if you really want to learn about how to invest successfully in the stock market, check out the BetterInvesting web site. There are many webinars and local chapters providing very inexpensive classes and events for long term, buy and hold, investor. BI is a non-profit educational organization and by learning how to do it yourself, you won’t be paying some financial planner or broker so that they can afford to buy new cars, take great vacations, and live a life style based on your fees and expenses. I’ve been doing this for 25 years and i’ve learned how to do it myself. I belong to three investment clubs and started a club for the family 10 years ago so that our kids and grandkids are not saying many of the same things that i just read above.
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