Are You Risking Your Retirement with These Two Investment Myths?

Pervasive Misinformation Could Cost You in Retirement

In our many years working with clients, we have noticed a disturbing trend: most people are investing based upon two faulty premises, both of which are pervasive myths and neither of which are in an investor’s best interest:

  • The Myth of “Riding Out the Market”
  • The Myth of Getting a “10%+ Annual Return”

Have you heard these? Are you investing based upon them? If so, you’re not alone. However, we’re here to tell you that these myths are old-school and outdated, and they aren’t serving you as well as you may believe.

Here’s the Truth No One Ever Told You About ‘Riding Out the Market’

The S&P 500 Index was at 1,469 in January 2000 and ended at 3,258 at the end of 2019, pretty close to where it’s at currently. This looks like a huge gain, 1,469 all the way up to 3,258! However, to receive this growth, you had to “ride out the market.” In fact, you had to ride out two (2) large stock market losses (approximately -50% each), the first during the Technology Bubble from 2000-2002, and the second during the 2008 Financial Crisis from 2007-2009. But if you were a “good investor” and “hung in there”, you “stayed in the market” and you “rode it out”, you were rewarded with this seemingly large gain from 2000 through 2019 with the S&P 500 Index growing from 1,469 to 3,258.

Here’s the problem: The average annual compounded increase to the S&P 500 Index from 2000 through 2019 was only 4.06%, That’s right, only 4.06%, and this is before fees. We find that many retirees may pay 3% or more in total fees without even knowing it, so this potential growth net of fees could be, well, almost non-existent.

Digging into the Data

The 4.06% average annual increase to the S&P 500 Index between 2000 through 2019 is an accurate number if you “rode out” an approximate -50% stock market collapse during the Technology Bubble between 2000-2002, recovered by 2007, and then “rode out” another stock market collapse of approximately -50% during the 2008 Financial Crisis between 2007-2009. After the -50% loss from 2000-2002, you had to make +100% just to recover by 2007. Then after the second loss of -50% from 2007-2009, you had to make +100% again just to recover by 2013. Two -50% losses required two +100% recovery gains just to break even, not to make any gains, just to recover.

The S&P 500 Index was at 1,469 in January 2013, the exact same level as of January 2000. These two (2) separate sets of approximately -50% stock market losses caused a 0% increase to the S&P 500 Index from 2000-2013, a period of 13 years, before fees.

SEE ALSO: Questions You Must Be Able to Answer to Have a Successful Retirement

Thinking through the Numbers

Think about what the data above is really showing you. Between 2000 and 2013 the stock market, as represented by the S&P 500 Index, had two -50% losses and two (2) +100% gains. The two -50% losses total -100% in losses and the two (2) +100% gains total +200% in gains. And yet, contradicting all the math you have ever been taught, -100% in losses plus +200% in gains equal a zero percent (0%) gain over 13 years! Maybe this is what the kids call “New Math?” The stock market lost -50% between 2000 through 2002 and then fully recovered by 2007. And then the stock market lost -50% from October 2007 through March 2009, and then fully recovered by January 2013. However, for 13 years, between 2000 through 2013, the stock market was completely flat, increasing 0% per year.

By “hanging in there” and “riding it out,” the stock market recovered all of its’ losses over 13 years. But here is the key, while you were saving money, did you base your plans for retirement, when you could retire, how much income you could take out of your assets, and how long your money would last on earning 0% for 13 years? Probably not, no one does that. Additionally, you must reduce the 0% annual increase for 13 years by any fees you paid.

But Wait – How Did My Account Grow During this Time Period?

We’ve shown this data to many of our clients, using simple charts and graphs to assist, and many of them have told us the numbers simply can’t be true because while they were working their accounts grew a lot from 2000 through 2019, certainly a lot more than 4.06%. We then tell them their account values could have increased in value, but probably not from stock market growth, their accounts increased in value most likely from all the large deposits they added into their 401(k) and other plans month after month after month. Investment accounts increase for two (2) reasons: growth and additional contributions. If they didn’t get much growth, most, if not all, of their account value increases came from their own additional contributions.

What About the Myth of 10%+ Annual Returns?

During the Technology Bubble stock market collapse from 2000 through 2002, you may have been told to ride out the market volatility and losses because you are in it for the long-term and you would be rewarded with a big rate of return because the stock market always averages a 10%+ rate of return. So in 2000, after the market dropped -10%, you were probably told “don’t worry about it,” …“it’s just a short-term loss,” …“you will recover quickly,” …“it won’t go down that much,” …“don’t watch it all the time,” and …“the return you get will be worth all the risk you are taking.”

Next, of course, the market went down a second -10%, bringing your total losses to -20%, and you were again probably told the same things. Then the market went down a third -10%, bringing your total losses to -30%, and you were fed the same information. Then the market went down a fourth -10%, bringing your total losses to -40%, and guess what, the same things were said. Then the stock market went down a fifth time, again -10%, bringing your total losses to -50%, and you were once again given the same, tired, outdated advice.

But guess what? None of these old adages served you. During the 20-year time period from 2000 through 2019, if you “rode out” the market and experienced S&P Index returns you:

  • Suffered two different approximate -50% losses.
  • Needed two different +100% returns just to recover – not to make any money, just to recover.
  • Were rewarded with a whopping +4.06% annual compounded increase from the S&P 500 Index. (The 4.06% annual compounded increase was before fees.)

Frankly, you could have gotten almost the same higher rate of return from CDs in the bank. Using the national average CD-rates for $100,000 CD’s, if you had bought a 5-year CD in 2000, renewed it at a lower rate in 2005, renewed it at an even lower rate in 2010, and renewed it at an even lower minuscule rate in 2015, you would have earned a compounded 3.99% annual rate of return based on data provided by GO Banking Rates and JCDI. And remember, the 3.99% CD rate had no fees!

Now, we aren’t saying to put all your money into CDs. However, this example emphasizes the fact that the stock market did not provide you anywhere close to the rate of return you were told you’d earn, and could expect to have received, based on how much risk you were taking.

SEE ALSO: 7 Steps for a Secure Retirement

We Do Not Believe in the ‘Riding Out’ Big Losses Myth

We will never tell our clients to ride out big losses in the stock market. Every plan we create is to avoid big losses in the stock market because as a retiree, you can’t afford to take a big loss at this time in your life.

Here’s the big question: can you plan, take a high level of consistent income, and feel secure if your assets are behaving like this? The answer is you cannot. It is mathematically impossible for you to plan, take a high level of consistent income, and know that you will never run out of money for as long as you live without diminishing your portfolio if your assets are subject to high volatility.

History tells us that we will experience another stock market decline like the Technology Bubble between 2000 through 2002 or the Financial Crisis from October 2007 through March 2009. Why? Well, large stock market losses are just part of the normal cycle the stock market will always go through.

Your Key Takeaway on Investment Risk

Stock market losses aren’t bad. Rather, they are normal and expected. What’s worse is if you are a retiree and you don’t protect your assets against the large stock market losses that will inevitably happen.

Do you think you will need to navigate any more -40% stock market losses in your lifetime? The truth is, you probably will. Depending on how old you are, you may have to navigate many more -40% stock market losses. Isn’t that a scary thought? What if you are using your assets for income and you lose 40% of your portfolio?

At Peak Financial Freedom Group, we strive to provide our clients with retirements free of these types of worries. Contact us today if you’re interested in discussing how you can have a more confident retirement, free of myths and outdated investment premises. And, if you’d like to dive deeper into the topics discussed in this article, please check out our book, Momma’s Secret Recipe for Retirement Success, where we share more truths about risk, the stock market and so much more.

This information is provided and intended to be used for general educational and informational purposes only and is not intended as a solicitation for you to buy or sell any financial product. This information is not mean to be relied upon as actual financial or tax advice. The ideas, thoughts, and strategies presented here are those of the Management Team and provide an insight to our views at Peak Financial Freedom Group, LLC and its affiliates. None of this information is intended to give you specific tax, investment, real estate, legal, estate, or financial advice. The planning and ideas in this data are not suitable for all individuals or situations. Consult a qualified financial professional before making any investment decision.

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Peak Financial Freedom Group
2520 Douglas Boulevard, Suite 110
Roseville, CA 95661


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