Wednesday, January 07, 2009
Surely, one of the most horrible myths of investing in stocks over the last 25 years - the "average" rate of return as it applies to planning your future - will not survive the current downturn.
Surely, if they haven't already done so, your typical retail investor will soon realize that financial planning entails much, much more than historical performance data from Bloomberg, investment portfolios from Money Magazine, and a few simple calculations.
Well, if the business section of the New York Times has anything to say about it, maybe not...
Now that things have settled down a bit (that is, up until today), those individuals who haven't just been tossing their brokerage statements in the trash these last few months and are now curious about how long it might take to dig out of the giant hole that has been made in their 401k can turn to the Times' latest interactive graphic - Calculate Your Financial Comeback - to find out.
Just plug the numbers in, adjust your rate of return (as if it were that easy...), hit Calculate and you'll get the bad news.
By the way, what you see above are the default values - I'm not sure if it's a good or bad indication that they've started with a $100,000 investment portfolio and assumed a 40 percent decline.
The annual contribution of $5,000 and a four percent return look reasonable, but if the $100,000 less $40,000 defaults are representative of American investors, the current malaise all of a sudden makes much more sense.
Anyway, the answer produced when the Calculate button is depressed is that it will take six or seven years with a four percent return to get back to the $100K mark, prompting the inevitable questions, "Where can I get a super-safe 4 percent return these days?" and, "Does this mean I have to take on more risk to get a better return".
Don't forget that the result includes $5,000 a year in new contributions which accounts for about two-thirds of the $40,000 return to six figures - four percent interest on $60,000 amounts to just $2,400 a year.
By the way, not long ago, I actually talked to one of those fellows who hasn't been opening up any statements or checking their balance online for months - he was still as happy as can be about the world around him.