the math hurts
What is the name for what’s going on with the economy these days? We’re still technically not in recession and I think shrieks about a depression are overdone. A crisis? Whatever it is, it continues and I see no signs that it will abate before long.
I had managed to stay calm about the crisis even after seeing my investment and retirement accounts (IRAs) stagger. I work on Wall Street, so I’ve seen the bloodbath in the workforce – people who worked in accounting or IT who had nothing to do with the idiotic ponzi schemes got axed. Times are tough, and from an objective viewpoint I understood that.
Here’s what brought it home for me. I have a 401(k), and the company it’s with has a nifty little feature to calculate “real” return; returns with the matches, contributions and so on factored out so you only see the return on what was in your account. Up until 2008 I had been running at a slightly-disappointing-but-tolerable 8% per year return.
From my point of view 8% on a tax-free return is not a bad return, but in the heady market froth of the last few years it seemed less than exciting. I had managed not to worry too much about my 401(k), but I finally broke down and checked it Friday. The result? This year, down 65%. My portfolio in my 401(k) is dull: S&P 500 index funds, a midcap index fund and a euro-pacific index fund (plus I have a bit in stable value, about 5% of the total).
That alone wasn’t enough to bother me, but this was: the standard assumption in the personal finance world, based on a lot of historical stats, is that a 10% per year return in the stock market is reasonable and expected for retirement planning purposes. At first glance, that seems to be reasonable. 10%? No big deal. But here was the kicker, for me: it takes 11 years to restore a 65% loss to breakeven at 10%.
I need to make 10% per year for 11 years just to get back to where I was in 2007. Is there another dot-com run-up somewhere in the future, when the market will surge 20%, 30%? Keep in mind I’m talking about index funds, so the return is based on the market as a whole, not an individual stock where the possibility of a 30% rise is greater (although the possibility of a 100% collapse is also greater).
I’m not saying this to discourage anyone from investing in index funds, but it is a brutal reminder that you are not “investing” in index funds: you are SAVING. I have some spare cash and I’m tempted to put it towards individual stocks rather than index funds when I look at those breakeven numbers. 11 years of great returns to break even? Whee. If you ever needed a reminder why you shouldn’t put ALL of your savings and investments in the market, thinking about the math on losses should be enough to keep you scared straight. It takes a 100% gain to recapture a 50% loss…