Tuesday, September 30, 2008

Your future is on sale. Stock up.

The chart above shows the value of the Standard & Poor's 500 from 1980 to today
As a frame of reference, I'll tell you that I have a bachelor's degree in accounting from Widener University. Just so you know.
Over the past couple of days much hand wringing and teeth gnashing has been going on over the wild fluctuations in the U.S. stock market, brought about by the collapse of several banks and brokerages.
The chart above shows the value of the S & P 500 from January 1, 2008 until today.
When viewed on the short term, the thing looks like a train wreck, and your money is worth about 24% less than it was at the beginning of the year. Starting in 1994 however, you have an entirely different viewpoint.
The Standard & Poor's index has a wild history. From 1994 to 1999, the S & P gained an average of 24.1% per year. In 2001 it lost 11.9% and in 2002 it lost 22.1%. The following two years would see it gain 28.9% and 10.8%, and 5%, 16% and 5% the next three. Investors who bought during the mid-1990s and sold the index in the early part of the 21st century are probably still trying to make up the gains of those next 5 years. That's why market timing is gambling and something called dollar-cost averaging works. It isn't rocket science, folks - as much as some people on TV try to make you believe it is. It's called an average for a reason.
What it is generally about is patience and persistence.
Most small investors run to the Internet or the newspaper stock page and check the value of their stocks every day. Do those same people check the value of their home every day? No. Generally, the only way people know the value of their home is when they try to sell it. Otherwise, they're happy to have the roof and floor and don't consider the value much.
Short-term fluctuations are normal. You'll hear some gloom and doom forecasts about a market collapse worse than The Great Depression and probably hear some of your friends and co-workers talking about moving their 401(k) money from stocks to cash. That's a secure move, but at an interest rate of about 1.5 percent it isn't going to be worth the taxes you'd pay on the interest if you withdrew it.
It's a shame if you're set to retire in a month and were ready to cash-out the big bundle you've saved over the past 10 years, but that's a small percentage of investors, and generally you're going to live a lot longer than your retirement age, so pulling out of the market when you retire isn't always the best decision either.
So, look on the bright side for a change. If you're still tossing money into your retirement fund, consider upping the percentage of your contribution. Stocks are on sale. And don't mess around much with specialty mutual funds and other junk. It's all about the index. Mutual funds compare their performance to the S & P 500 index for a good reason - because generally, it's the best way to invest.
If the market totally tanks and we are indeed headed for another Depression, the least of your worries will be the value of your stock portfolio, believe me.


kimmyk said...

right now they say you have to work til you're like 70, right?

i'm sure that's gonna go up.

i'm trying not to think about any of it...burying my head in the proverbial sand is working for me today.

i might stay here a while.

Anthony said...

I don't see myself ever being fully retired. I'm way too restless to sit around and vegetate.
As long as I can get up and move around, I'm going to want to do something.

I'd like to be able to get out of bed and go to a job I WANT to go to rather than one I HAVE to go to.

Kate Michele said...

all this bailout talk is making me restless

scare tactic or not its making me anxious, luckedly i dont have much which is good cuz that means i dont have much to lose :D