Welcome to the 401(k) generation! The simplicity of pension plans and high interest CD’s is in the past. We new-agers are expected to be stock market savvy. And, indeed, our retirements depend on it.
But. . . why? Why is it that we need to engage the complexity of the stock market? Well, for starters, there’s inflation. Inflation makes our money less valuable. The average annual inflation rate is three percent. That means $100 today will be worth only $97 in a year, $94 in two years, and, after 25 years, only $48. Just to keep the value of our $100 stable, we must seek at least a three percent return. Add taxes to that, and we need to shoot even higher.
Money market and similar investments, at best, only approach the inflation rate. And, they don’t always do that. A few short years ago, inflation was gobbling up their one percent return. We tend to think of these accounts as safe because their rates are predictable. . . but, they are predictably low. And that’s the reason they aren’t safe.
For most of us, our best chance for achieving stability and growth is the stock market. Oh… let the heart palpitations begin. Risk. Fear. PANIC. But, really, why should the stock market send us into tailspins about losing money? It’s our “safe” investments that virtually assure losses over the long haul. Sure, there will be times when we lose money in the market. But, over the long haul, we generally get growth, not loss. The market’s the only game that offers that chance.
As with any game, though, there are rules. The key rule? The stock market is for the long-term. Why? Because, in the short-term, the market goes up and down, like a yo-yo. But, over longer terms, its general trend is upward. Picture a little boy with a yo-yo, but walking uphill.
Over the last hundred years, the market produced an average annual return of 11 percent. That’s long-term growth. During this same time period, though, it’s worst single return was in 1931 at negative 43 percent. That’s the yo-yo.
This is the nature of the game. And it’s essential we understand it before we ever sit down to play. Once we get it, we’ll also get that our winning strategy is to stay invested. We’ve got to endure the yo-yo long enough to let the little boy reach the top of the hill.
If we lose sight and begin worrying too much about the yo-yo, we may tend to adopt a losing strategy. We buy when the market is up because we’re confident. We buy high. We sell when the market goes down because we’re nervous. We sell low. When we buy high and sell low, we’re sure to lose.
Nervous Nellies might even consider choosing investments that don’t produce highly volatile swings. The yo-yo may never swing very high, but it won’t swing very low either. And, as we get more accustomed to the rise and fall of the marketplace — plus its benefits
— perhaps we’ll be ready to endure the volatility of potentially higher return investments.
Whatever it takes to get us invested and keep us invested is a winning strategy. No, it ain’t simple. But, it’s the only game in town, so we might as well learn to play.
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