The Good, The Bad, and the Questionable

Personal Money Planning |

By Gary Silverman, CFP®

We are at an interesting crossroads when it comes to investing. Depending on who you are, you might be in a really good place or a very questionable one. Let’s look at the good place first.

For whatever reason, you’ve been investing 10, 20, or 30 years. While you might not have put all your money into stocks (smart move) you did put a sizeable portion of your portfolio into equities. It might have been 30% or 50% or even much, much higher. The rest was in bonds and the like.

Your portfolio has done remarkedly well. The stocks may have taken a holiday a couple times (hard to ignore two 50% losses back in the first decade of the millennium), but across the time you’ve held them you have seen a very nice return. Even your bonds have done well as interest rates dropped over the same time period.

Congratulate yourself. Like I said, you’re in “the good place” of investing.  Whether through skill or luck, your portfolio is ready for this next decade, whether it be a “good” one or a not-so-good one.

But let’s say that you’re in that questionable place. You haven’t had much, if any, stock exposure over the last decade or three. You’ve missed out on a lot of growth. If you had money in bonds or other fixed income instruments you may have had a few seasons of good interest rates, but nothing compared to the growth in stocks.

You are in a bit of a pickle. You could (finally) jump onto the stock bandwagon, but with all the mileage on it, the wagon might lose a wheel at any time. And in your case, you won’t be giving back a bit of the gains you enjoyed, you’ll be sitting on real losses.

Staying in bonds and such sits you in a rather bleak interest rate future. You almost have to hope that the Federal Reserve messes up and loses control of inflation, pushing up interest rates in the process. Otherwise, you are fighting a losing battle as government bonds are already priced to give a negative real return (interest less inflation) and most corporate bonds aren’t doing much better.

This is the same situation that newer investors are looking forward to. High stock prices and low interest rates don’t position you for a lot of excess returns in the next many years. Might happen, but don’t count on it.

Now that you are depressed, let me lift you up a bit. If you have a long time horizon ahead of you, then if the next cycle starts in the down direction, you’ve got time for future ups to even everything out. Folks nearing retirement hopefully have a couple decades ahead of them, so this applies to them as well.

Just be careful not to plan on immediate stellar returns (a good thing for all investors to remember). Surveys show that the average person thinks stock returns will average well over 15% every year. Long-term averages being closer to 10%. And those are just averages. From 2000 through 2010 the total return was close to zero.

Plan realistically rather than hopefully.


Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.