It may be that during the last times investors saw equities drop dramatically many people were so busy working that the effects were felt, but they weren't left for dead. Consider that the dot com bubble and the credit crisis were like caution lights on the dashboard of the car, warning that the situation could get much worse, leaving one stranded. In addition to being busy, many of us were making contributions to our retirement accounts buying shares of equities at attractive prices, so the hold and hope crowd feels vindicated now that they are back to even and beyond. For a visual description of this discussion please watch:
Things were vastly different, however, if investors were drawing income from their life savings. In preparation for the good, the bad, and the ugly let's take a moment to look behind us as well as in front. As we have discussed, equities reached a peak in 1928-29 and by 1932-33 values were off 90% from peak to trough. What if it happens again. We have gone over the ratios, now we will look at actual dollar values, as what has happened before may be in the cards to unfold again. Sooner than later. Had an investor reached the pinnacle of $1,000,000 with the DOW in 1929, by 1932 the market value bottomed at about $108,000 by our records. It took about 22 years for $108,000 to get back to $1,000,000. That's assuming stock investors stayed in stocks, which probably is not likely for most investors to do. Most investors do not have that much patience. The second assumption in the past is that there were no withdrawals over the 20 years or so it took to get back to even. 20 plus years is a long time to not need any money. So if there was income, the income must have come from other places.
The situation is vastly different when assets aren't sufficient to live on. As Yahoo finance notes, saving for retirement is difficult, and some people simply give up on it. A recent Wells Fargo survey found that 34 percent of respondents think they will work until at least age 80 before they can retire. An even larger 37 percent said they will never retire and will continue to work until they are too sick or die. Those notions sound like more of a pipe dream than they do a sound financial plan. Certainly holding investment vehicles when income is necessary due to health reasons for the investor or someone in the family changes everything. It is a new, but very unpleasant reality that suddenly rears its ugly head.
$1,000,000 doesn't buy what it used to, but it can still do a lot of good. Investors with that kind of money may find with a 4% yield it is reasonable to expect an income of $40,000. If someone wants $80,000 a year regardless of income from a pension or social security, it is necessary for contributions to be made and growth to occur so that the $1,000,000 has the chance to double over time to $2,000,000 so that the annual income is $80,000. One thing is for sure, however, the last thing an investor wants to participate in is a loss of 50% or more. With that loss of 50%, for example, the $1,000,000 that needed to double is instead cut in half. Which means that with $500,000 to maintain our withdrawal income at the same $40,000 it will be necessary to double yield to 8% a year. Suddenly the nest egg is on very dangerous ground. And the ability to double is in serious jeopardy.
As we look at the stock market that is near the all time high, it may be appropriate to see what may be done now to limit investors' downside participation. In fact, while there are no guarantees, it might be a good idea to see how a goal can be set to limit losses in one year to 20% or 25%. When there is a loss of 20% investors need 25% to get back to even. When the loss is 60%, however, the gain needs to be 150%. Back in 1932-33 it took 1,000% to get back to even. Instead of swinging for the fences to enjoy great gains after severe losses, investors are smarter to limit their losses in a bad year. A small loss can be offset more easily over time, keeping investors in the money game. A large loss may cause the game to be suddenly over. Out of the game and out of the money. With all of the time in the world.
Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
This information contained in this newsletter is general in nature and should not be construed as comprehensive financial, tax, or legal advice and the opinions expressed are not endorsed by NPC. As with any financial or legal matter, consult your qualified securities, tax, or legal representative before taking action.
While there are over 3,000 local financial advisers with many different opinions, it’s possible that not all firms in the Conejo Valley pay for independent research. This independent research is one of the features that helps investors see the larger picture and make appropriate, if not more informed decisions. The independent research has been used with investors in the workshops the firm conducts since1999 when John Grace became Master Certified and a Charter Member with the H S Dent Advisor’s Network.
“Master Certified” references those who pay a fee to learn about various economic trends and have demonstrated by passing tests the ability to effectively answer.
Investments are inherently risky and will fluctuate with changes in market conditions. Consideration should be given to the possible loss of a part or all of principal invested.
Indices are unmanaged measures of Market conditions. It is not possible to invest directly into an index. Past performance is not a guarantee of future results. -Examples and rates are used for illustration only, not indicative of any particular investment, actual results will vary.