Wikinvest Wire

One myth of investing apparently endures

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".
IMAGE 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.

That's depressing...

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.


Nick said...

When you add in the real annual inflation rate (ie: not adjusted for lying) from shadowstats (around 7%, iirc), it becomes even harder to preserve your wealth. If it's after-tax normal savings, you also have to add in the taxes on your "gains" to keep up with inflation, which depending on your tax rate could be fairly substantial.

Don't worry, though... the government is here to help by creating much higher inflation in the next 5-10 years. You could probably safely use 10% as your inflation number when the government is "struggling" to waste as much money as possible combating the specter of deflation. The more accurate you make the estimation, the more you might think that the people with no savings and boatloads of debt might actually be on to something... la Obamanation!

John S said...

I notice the inflation field doesn't support double digits, no less the triple digit inflation the Fed has planned for us.

Anonymous said...

I wonder about the long-term politics of this. As the world of 401(k)s replaced the world of pension plans and optimistic assumptions about Social Security, Joe Sixpack was told he had to take more responsibility for his own financial future. He had to learn something about the world of investing, probably a field far from his own, but he was assured the market always goes up in the long run, so it would be OK. Once that is shown to have been a pig-in-a-poke, how will this not lead to calls, however misguided, for a return to a more socialized economy? Then, once that is proved impossible, how do we not wind up with upheaval and violence to make the '60s and '70s look like an old ladies' tea party?

Anonymous said...


Consider this: If your 401(k) had $100,000 invested in the average stock mutual fund at the beginning of last year, you've lost $39,500, thanks to the worst year for funds since Lipper began tracking them in 1959. You'll have to earn 66% just to get your account back to where it was a year ago.

Anthony J. Alfidi said...

But with precious metals in your portfolio, you've got an asset class that keeps up with the coming inflation.

Anonymous said...

Yes. My physical gold bought during the last 5 years, gave me a return of 46% at the end of 2008.

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