Retirement is a long journey that you should plan to last three decades. During the journey you’ll be using the money you have previously saved, earnings from your investments, government or private pension, Social Security and maybe earned income, inheritance or gifts. As the years pass the same goods and services will cost more and more as inflation erodes purchasing power. Unexpected emergencies, deteriorating health, bad decisions, rotten luck and sorry investments are also possible. It’s easy to see why the greatest fear of retirement is “running out of money”.
The stock market is known to all, but understood by few. This is the place where you can buy and sell partial ownership (shares of common stocks) in great American companies. The price of shares is a function of both short and long term influences. In the short run prices are affected by investors’ expectations about where the market & economy are headed, global developments, quarterly earnings and numerous other real or psychological factors. In the longer run stock values generally track corporate earnings with consistently profitable and growing companies going up in value and unprofitable or shrinking companies going down. Since few, if any, of these underlying drivers of values are known, the stock market is inherently risky. You can double your money if you guess right or lose it all if you guess wrong. As was witnessed during America’s Great Depression or in Japan since 1990, stocks can consistently lose value over many years, or even decades.
Those who sell stocks to the general public make a commission each time a stock is bought or sold; therefore, it is in their best interest that people participate in the market. The “investments” bought and sold take many shapes and sizes from shares of individual stocks, mutual funds, options and more with each offering a dazzling array of choices. To keep you committed to the market Wall Street’s “representatives” have devised a bewildering language of jargon that most of us, and many of them, don’t understand. Added to the jargon are myths they spin to keep you committed. Myths like “don’t sell now you’ll miss the coming rally, in the long run you’ll be fine or don’t think losses when the market falls, think buying opportunity.” Even though these myths are consistently wrong, many retirees stay the course and keep their money in the market.
So, will the market come back? How long is the long run? Do you have the nerve to buy when the market tanks? By journeying back into the most recent past, analyzing market trends in other countries or recalling your past market experiences, you’ll conclude one thing: the market is risky. It can take your retirement money and never say sorry. Yet, the stock market is the main depository for retirement money because myths like “long term you’ll do better in the market” are simply too powerful to resist. I encourage you to resist the temptation if any of the following fits you: (a) you’ll need all your savings to get you and your loved one to the end of retirement’s journey; (b) you have no way to replace losses if you guess wrong; (c) you don’t fully understand the risks you are taking; (d) your past worries with the stock market has kept you from sleeping; (e) the broker/money manager that is telling you what to do today is the same that lost you money yesterday. If you believe the market is not potentially hazardous to your retirement well being, please study the American stock market movements over the past 20 years or review Japan’s experience since 1990. Below are the graphs of both. Is the Nikkei two decades ahead of the DJIA? Is the DJIA now at its historical peak like Japan’s Nikkei was in 1990? Will the DJIA mirror the Nikkei and fall to 2500 in the next 20 years? Looking back 20 years from now will we be looking up at the last peak in 2007 or looking down from a higher peak? Anything is possible so please be careful with your retirement money.
Shelby J. Smith, Ph.D.
August 25, 2011