Your Retirement Plan Is In More Trouble Than You Realize

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Beyond Buy-and-Hold #54

It’s Sunshine Rob here again to bring you more happy face news on the wonders of Buy-and-Hold. The topic of today’s sermon is: Your Retirement Plan Is In More Trouble Than You Realize.

Everyone knows that we have experienced a Lost 12 Years in the stock market. Stock prices are today close to where they were at the top of the bubble. Investors have earned a small gain from the receipt of dividends but most of that has been eaten up by inflation. We have essentially been standing still.

All acknowledge that that’s bad news. But few realize how bad.

Twelve years doesn’t sound like all that long a time. Most of us have life expectancies of perhaps 80 years. We certainly never wanted to go 12 years without seeing the numbers on our retirement portfolios increase, but into every life some rain must fall. My sense is that the general feeling is that this too will pass.

We are underestimating the damage a 12 year freeze is causing

Your Retirement Plan Is In More Trouble Than You Realize
Your Retirement Plan Is In More Trouble Than You Realize

Few of us start saving before age 25 and most of us hope to retire by age 65. So we only have 40 years in which to accumulate the million dollars or more in wealth needed to support a decent middle-class retirement. A good number of us graduate with large student loans. Members of that group might not be able to begin saving in a serious way until age 35. Those people have only 30 years to accumulate the million dollars.

To lose 12 years when you only have 40 to do the job is to lose something close to 30 percent of the time available to you to finance your retirement. To lose 12 years when you only have 30 to do the job is to lose close to half of the time available to you to finance your retirement. We are sinking fast. This is serious stuff.

I know what some of you reading these words are thinking. “Yes, we’ve had some bad years, but a string of bad years is likely to be followed by a strong of good years.” Am I close?

No dice.

Once the bad years go on long enough that stock valuations are far below fair value, this will be so. It really is true that bad years eventually put in place the circumstances needed to see good years. But guess what?…

Stocks are at scary high valuations even today!

Stocks were so insanely overpriced in the late 1990s that even 12 years of zero returns has not been enough to pull valuations back to where they must go for the stock market to generate good returns on a going forward basis. We are today at the valuation levels that in ordinary circumstances would be causing informed investors to start preparing for a crash.

If you think that the hit you have taken over the past 12 years has been tough to bear, you ain’t seen nothing yet! Stocks don’t become a good investment class again until we see capitulation. You don’t hear people saying good things about Buy-and-Hold when they are preparing to capitulate. There are still lots of Buy-and-Holders around today. We are nowhere close to capitulation yet.

Others are thinking that these losses are not so bad given how many good years the stock market dished out from the early 1980s through the late 1990s. Fair enough. But most of us were using calculators that assumed annual returns of 6.5 percent real per year in all years when checking whether our retirement plans were on track in those days. How many have gone back to the calculators and checked what numbers they produce when realistic assumptions are entered?

The damage done by compounding of returns in REVERSE

You have heard about the power of compounding returns? It is often described as the eighth wonder of the world. There aren’t too many of us who would be able to retire before age 90 if it were not for the compounding returns phenomenon.

When we lose 12 years of returns, we lose all the compounding that would have applied on those higher portfolio numbers too. We are today experiencing the power of compounding in reverse.

Our retirement hopes are not fading a little bit with each additional year of zero returns, they are fading a lot. It’s happening in a soft, gradual way, so we don’t necessarily get alarmed to see it play out. But compounding is a powerful force both when it applies in the regular way and when it applies in reverse and the power of this force is not diluted for those who do not notice what is happening to them.

I’m some fun guy, huh?

You might not like the message, but don’t shoot the messenger

If things are bad, you need to know. Not knowing that your retirement plan is going to fail is like not knowing that you are headed down the road to a heart attack. Your real friends want you to know so that you can do something about the situation before the odds are stacked too heavily against you. Time lost as a result of living in denial can never be won back.

There are lots of things we can all do to save our retirement plans. I’d like to tell you about them. But the reality is that there are not too many who are willing to join in the conversations we need to have today because they are still living in denial about the dangers of Buy-and-Hold.

Following Buy-and-Hold clogs up your financial arteries big time, okay? Only your true friends will tell you that.

We need to talk. I hope that I’ve scared you enough to cause you to give the idea some serious thought. There’s still time to save that retirement ticker of yours!

But not so much that you can afford to be wasteful of any of that which remains.

Rob’s bio is here.

( Photo from Flickr by Aly1963 )

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10 Responses to Your Retirement Plan Is In More Trouble Than You Realize

  1. It’s hard to imagine that 12 years of the time you worked hard has been deemed as useless when considering retirement. There are a lot of people who rely on this. It’s really sad.

  2. Veronica:

    You are saying something very important. It IS sad. And it is because it is so sad that most of us have been reluctant for 32 years now to acknowledge what the academic research in this field has been telling us.

    This story has a happy ending, however. If we continue to deny these realities, the economic crisis will worsen. At some point, things will get so bad that we will be forced to acknowledge them. At that point, we will enter on a path that will lead to some absolutely amazing advances. We will go from being in the worst economic circumstances we have ever been in to being in the best.

    Sometimes we need to experience pain to work up the courage to make big changes that are good for us. We have all experienced that on a personal level. We are now in the process of experiencing it as a society.

    I wish you well.

    Rob

  3. I’m at a loss as to how to format the column of data. It should read in order; average annual return, $10k Initial Investment Rebalanced (Nominal), $10k Initial Investment Rebalanced (Real).

  4. Kevin, I note you have censored my post containing factual data disputing Mr. Bennett’s assertion that the past 12 years was a “lost” period for investors holding a diversified portfolio and using a buy-hold-rebalance strategy. Apparently you prefer that Mr. Bennett be allowed to pursue his agenda rather than be required to explain inconvenient data which contradicts his opinions. Fair enough. I will henceforth ignore your blog as have so many other people according to Alexa rankings. Good day.

  5. I stand corrected. Apparently after consultation with Mr. Bennett you decided to allow my comment to stand. But again, I’ll find my way to the door and won’t bother you again. It’s not my intent to engage in a conversation with Rob Bennett at your blog. Past experience has shown any attempt to engage in a reasoned discussion with him is an exercise in futility. Plus unlike Rob I don’t have all day long, seven days a week to devote to his hobby of posting at any and all personal finance related sites on the Internet where he’s not yet been banned. I just thought it important to point out to what few readers your site gets that Rob Bennett is not necessarily someone you want to rely upon for accurate information regarding personal finance or investing. Adios.

  6. I have an agenda in the same sense in which every blogger has an agenda, Carlyle. I want to help my readers learn how to save and invest effectively.

    You have a different sort of agenda. You have an agenda of blocking the national debate we need to have on the 32 years of peer-reviewed academic research showing that Buy-and-Hold can never work for a single long-term investor. It is your pursuit of that inappropriate agenda that causes difficulties.

    We need to hear your point of view. When you share your point of view, you add something to the debate. We do NOT benefit from the know-it-all attitude. The know-it-all attitude is a stone cold drag. It pulls us all down.

    I wish you well. And I hope that we all come to understand how important it is that we get this investing stuff right.

    Rob

  7. Hi Carlyle–Your original comment was deleted because it contained language very similar to a series of spam comments that proceded it. As to Rob’s posts and comments, they are welcome on this site even if you don’t agree. You’re free to express your opinions on your own site, but allow Rob that same liberty here and elsewhere. The fact that you disagree with him does in no way render his opinions illegitimate. And if they are illegitimate, you should rest comfortably knowing that he will be proven wrong over time. If anything, you should welcome constructive dialogue.

  8. Creating streams of income is better in the long run. It might take longer to build but it’s the kind of income that pays you over and over for something you did one time. It beats trading hours for dollars any day.

  9. Hi John–That’s very true, but the hard part is figuring out what those income streams will be. It’s worth it to invest in some heavy research to figure it out though. Most people are way short of the mark when it comes to retirement savinvgs.

  10. I think that income streams + a well funded retirement portfolio is the best combination. You’re referring to passive income streams, like royalties, I presume. But those can run out over time and may not work by themselves for retirement. Good suggestion as a supplement though!

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