Study of Stocks Improves Understanding
A long time ago, well before I began giving investment advice, and even before I invested myself, I thought that having all of your investments in stocks was a wise move. The logic was simple. The common investments of that time were stocks, bonds, and cash. Stocks gave the better return: stocks earned 10%, bonds around 6% and cash 3%.
Basing one’s investment philosophy on a single piece of data may be better than basing it on no data, but not by much. While those averages are still pretty much true, an average is, well, average. And those averages are based on multi-decade numbers. So indeed, if I had put my money into stocks when I was born and looked at the results now, I would be very pleased. My stock portfolio would have soared, greatly outdistancing itself from those containing only bonds or cash (or even gold).
But very few of us have 50-plus year investment horizons, and those that do tend to look and see what their portfolios do every year, if not every day. Over the last decade, instead of returning 10%, their all-stock portfolio returned just about nothing. And their naïve friends who had all their money in bonds would have seen growth rivaling what stocks normally do.
These weren’t short-term numbers where volatile returns are to be expected. Short-term, gains or losses over 25% occur more often than most expect, but over a decade you’d think that the long-term numbers would bear out. At least that is what I thought in my youth.
Since then, I actually have had my money invested in the stock market. Initially, I gave it to a “financial planner” (at least that’s what she called herself). Imagine my dismay when she managed to lose half of my money…and do so in a bull market. Her concern wasn’t for my portfolio—it was for her commissions. It seems to me that the only thing she knew about her recommended investments was how much she’d earn on each sale, or the trip she’d win if she was the best sales person that month.
My experience with that stockbroker ended up being a good one. Not because she lost my money, but because it got me to study how investments work. I’ll never be done studying. It’s like walking to the horizon to see what’s there…you’re never quite done walking.
In my studies I found that indeed stocks return more than bonds and bonds return more than cash. I also learned that times similar to our recent crisis happen now and then. As all my readers now know from recent experience, the stock markets around the world can drop over 50% in just 12 months, though thankfully that does not happen often. My education showed that bonds do indeed beat out stocks for decade-long periods occasionally. And I discovered that some years, cash is king.
At the same time a truth also emerged: Staying away from the stock market, even if you are in your retirement years, is just as unwise as having all of your money in that same market.
Stocks are an important part of a retirement investment portfolio because:
1) You (or your spouse) may live a long time;
2) You’ll need more money every year to live comfortably; and
3) In addition to needing to earn more each year, you must also be able to cover the taxes on what you earn so that you have enough left over to afford your cost of living.
This article was published under the title "Avoiding Market is Unwise" in the Wichita Falls Times Record News on March 13, 2011.