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I’m petrified to fly. When I was younger I loved it, but my neurotic personality mixed with a bad flying experience have snowballed into a full-scale phobia. I know it’s not rational, so I overcome it. And here I sit at 25,000 feet.
We don’t like to see retirement investors jump from one investment to the next to the next. It’s not a good practice for retirement investing because (1) it increases risk and (2) there could be fees associated with frequent trading in retirement accounts. On the other hand, there are times that it’s OK to say ‘farewell’ to an investment.
There’s a term from the world of finance and investing called the sunk cost fallacy. Lots of us will deal with it at some point. (more…)
Now that we are seeing positive performance in the markets and signs that the economy is stabilizing, some investors are left wondering why their accounts have not recovered more of what was lost in the market decline of 2008 and early 2009. After talking to several investors in this situation it seems that the lack of a solid plan is the most common cause.
Football season is upon us. I am a diehard University of Kansas fan. As they say around here, I bleed crimson and blue (KU colors). The beginning of this year’s football season was considered the beginning of a new era. KU hired a new football coach, Turner Gill. And according to local media and fans, this was the best hire and one that would turn the program around and get us back to a bowl game. The experts even predicted KU would go 7-and-5 or 8-and-4 for the season! Why wouldn’t we be excited? So a couple weeks ago the Jayhawks made our debut against North Dakota State, a Division II football program. Everyone was expecting a blow out. Heck I expected a 40-plus-point blowout. Unfortunately NDSU didn’t get the memo, and they beat KU 6-3. The next day the local newspapers, sports talk radio and message boards were flooded with comments from fans and experts how Turner Gill was a bad hire. Within fewer than 24 hours, almost everyone was calling for his head. Following that game, KU had to play top-15-ranked Georgia Tech, a team that had looked unstoppable the week before. Now the predictions were for a 40-plus-point blowout – this time by Georgia Tech. But guess what – KU stepped up our game and won! Everyone was back on the KU bandwagon again, and Turner Gill became the best hire all over again.
My name is Kevin, and I have a fear of snakes. Even though I know most of them are harmless, I cannot fight the urge to head the other direction as quickly as I can. I’ve always been somewhat embarrassed by my excessive fear, but it turns out this is fairly common. Studies suggest that this fear has been conditioned in humans because of the danger snakes posed for our ancestors. And besides, the manly-man Indiana Jones was also terribly afraid of snakes.
A customer wrote us yesterday and told us that they didn’t need our advice right now because they had pulled all their money out of the market and put it into the money market fund in their account. While this is not the first time this has happened, it still bothers me a great deal whenever I hear about it.
There are certainly very legitimate reasons to move your retirement money into a cash-equivalent investment like a money market or stable value fund. When you don’t have the time to ride out shorter-term ups and downs of the market, you may need to get more conservative with your money. But the more frequent reason people pull out of the market is flat out nervousness. Many people that get nervous about the markets are tempted to pull their money out before (they think) things could get worse. When the market starts to go back up, the plan is to jump back into their original investments, reaping the rewards of future market gains.
Well, I’m here to tell you two things:
1. Pulling out of the market whenever you fear further declines is a form of market timing
2. Market timing is extremely risky and can easily cost you tens of thousands of dollars if your timing is off the slightest bit. Read on to get the facts.
Goldman Sachs Asset Management did a study that looked at market returns as represented by the S&P 500 Index from 1986 to 2006. Here is what the data shows:
Stay invested in all 5,297 days of this study period, and the annual return is 12.12%
Miss the 10 best days and the annual return is 8.56% – a difference of 3.56% per year.
Miss the best 40 days and the annual return drops to 1.87%.
Miss the best 70 days and the annual return drops to -3.02%.
As the data above indicates, if you are out of the market only a handfull of key times, your returns can be severely impacted. What does this return difference mean in terms of dollars in your account at retirement? Let’s say you just missed the 10 best days over the above 20 year period, saved $400 per month for all of those 20 years, and had a return on your investments of 8.6% (rounded for our calculator) per year. You would have $254,500 after the 20 years. Under the same assumptions, except if your return were instead 12% per year (rounded for our calculator), you would have $ 399,700 – a difference of over $145,000 (these are before tax numbers). And that’s only 10 days! Imagine if you had missed the top 70 days, just over 1% of the days covered in the time period, and lost money!
Given these numbers, is it really worth the risk of going in and out of the market? We think not.
-Scott Revare
The returns listed are based on the S&P 500 Index, which is the Standard & Poors’ 500 composite stock price index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. Past performance is not indicative of future results.
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