Some individual investors have expressed to me that the stock market is no longer a good place for their retirement. They have decided to put their money into safer assets, such as CD's, high-interest savings or bonds. Since this is a relatively risk-free strategy, the commensurate return is near zero. There is a fallacy among many retail investors that the stock market returns are negative during certain periods. This simply is not true for long-term investments.
I have heard stories of people "losing all of their retirement due to the financial crises". I want to disprove this fallacy for 20 year investment horizons. First, the most reliable investment strategy is holding the market - it's easy, diversified and low cost. Second, when investing for retirement, you should invest for at least a 20 year horizon.
Therefore, I took the market (NYSE, NASDAQ and AMEX) return for each month since 1948 (from Ken French's website). For each month, I calculated the average annual return if the market was held for 20 years. The chart is presented below. If you started your investment in any month since 1948 and held the portfolio for 20 years, you woud never lose value. The lowest average annual return starting months are during the early 60's - investors would get hurt by the 1972-73 and 1981-82 recessions. However, investors that started their portfolios in any month of 1988 or 1989 would still earn around 4% per year for 20 years - a compound return of 119%! This includes the dot com bust and the financial crises.
The conclusion is for retail investors to keep their investments in stocks. There are always periods of negative returns, but if you hold your portfolio for 20 years, history has demonstrated that you will earn positive annual returns in the long run. Of course, no one can predict the future, but the past has been pretty telling.
I have heard stories of people "losing all of their retirement due to the financial crises". I want to disprove this fallacy for 20 year investment horizons. First, the most reliable investment strategy is holding the market - it's easy, diversified and low cost. Second, when investing for retirement, you should invest for at least a 20 year horizon.
Therefore, I took the market (NYSE, NASDAQ and AMEX) return for each month since 1948 (from Ken French's website). For each month, I calculated the average annual return if the market was held for 20 years. The chart is presented below. If you started your investment in any month since 1948 and held the portfolio for 20 years, you woud never lose value. The lowest average annual return starting months are during the early 60's - investors would get hurt by the 1972-73 and 1981-82 recessions. However, investors that started their portfolios in any month of 1988 or 1989 would still earn around 4% per year for 20 years - a compound return of 119%! This includes the dot com bust and the financial crises.
The conclusion is for retail investors to keep their investments in stocks. There are always periods of negative returns, but if you hold your portfolio for 20 years, history has demonstrated that you will earn positive annual returns in the long run. Of course, no one can predict the future, but the past has been pretty telling.
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