The Stock Market - Is it Worth it? - Part 2

The number one concern of retirees is outliving their money. I find that interesting since in all my years I have never had a client run out of money. I think we often worry about the wrong things.

It is not uncommon to hear a 70-year-old say, “At my age I no longer have time to ride out the ups and downs of the stock market.” Some financial advisors and lots of insurance agents focus on this line of thinking because it seems reasonable at first glance, but I find it to be seriously, and dangerously flawed.

We established last week that the DOW index averages almost 10% annualized since it began 119 years ago. What people fear about the stock market is not the returns, but the short term volatility. History shows however, that major market drops tend to be short-lived with most recovering in just a couple of years. The biggest crash that any of us can remember, the one that began in September 2007, still only lasted about five years until full recovery. Here we are eight years later and the DOW has recovered all the losses plus another 28%, plus the annual dividends on top of that*. Therefore, an investment in the DOW index on the worst possible day in September 2007, would have increased nearly 60% by today**.

When older investors say they don’t have time to ride out the ups and downs of the markets, they are missing one very critical point. To be as blunt as I can be, when you die, your financial worries are over. Once you stop producing income from your labor, dying solves all financial problems. You have no more taxes, no house payment, no food bill, no energy costs and no need for a retirement account. It isn’t a short life that creates the problem, it is the potential for a long life. It isn’t the possibility of dying in five years, but the risk that a 70-year-old might live for 30 more years that creates the problem a financial advisor should be most worried about. If a 70-year-old had invested on the worst day possible in 2007, and then died, it wouldn’t have mattered. But if they were still alive today at age 78 they would be very thankful for having a portfolio that despite the dip, would have done so well. Ironically, perhaps the worst thing they could have done would have been to pull out of their market investments after the 2007 crash, in which case they may still have 20 years left to live and likely a whole lot less money to live them with.

Though it sounds blunt – and no one ever accused me of being otherwise – it isn’t a short life that is the problem. It is a long life. When you plan your investment strategy, prepare to live longer than expected, and then if you don’t - well then it won’t really matter anyway – at least not financially.The number one concern of retirees is outliving their money. I find that interesting since in all my years I have never had a client run out of money. I think we often worry about the wrong things.

It is not uncommon to hear a 70-year-old say, “At my age I no longer have time to ride out the ups and downs of the stock market.” Some financial advisors and lots of insurance agents focus on this line of thinking because it seems reasonable at first glance, but I find it to be seriously, and dangerously flawed.

We established last week that the DOW index averages almost 10% annualized since it began 119 years ago. What people fear about the stock market is not the returns, but the short term volatility. History shows however, that major market drops tend to be short-lived with most recovering in just a couple of years. The biggest crash that any of us can remember, the one that began in September 2007, still only lasted about five years until full recovery. Here we are eight years later and the DOW has recovered all the losses plus another 28%, plus the annual dividends on top of that*. Therefore, an investment in the DOW index on the worst possible day in September 2007, would have increased nearly 60% by today**.

When older investors say they don’t have time to ride out the ups and downs of the markets, they are missing one very critical point. To be as blunt as I can be, when you die, your financial worries are over. Once you stop producing income from your labor, dying solves all financial problems. You have no more taxes, no house payment, no food bill, no energy costs and no need for a retirement account. It isn’t a short life that creates the problem, it is the potential for a long life. It isn’t the possibility of dying in five years, but the risk that a 70-year-old might live for 30 more years that creates the problem a financial advisor should be most worried about. If a 70-year-old had invested on the worst day possible in 2007, and then died, it wouldn’t have mattered. But if they were still alive today at age 78 they would be very thankful for having a portfolio that despite the dip, would have done so well. Ironically, perhaps the worst thing they could have done would have been to pull out of their market investments after the 2007 crash, in which case they may still have 20 years left to live and likely a whole lot less money to live them with.

Though it sounds blunt – and no one ever accused me of being otherwise – it isn’t a short life that is the problem. It is a long life. When you plan your investment strategy, prepare to live longer than expected, and then if you don’t - well then it won’t really matter anyway – at least not financially.