Trending
Fear is a mighty powerful motivator but not always for good.
American investors currently have nearly $4 Trillion stashed away in ‘ultra-safe’ target date funds inside their 401(k) retirement accounts. Target date funds, replete with modest stock market allocations, essentially guarantee that investors will NOT be able to sustain their lifestyle well past retirement because they don’t take enough risk. Investors flock to them, however, because of fear.Despite two stock market crashes over the past 20 years, stock market returnshave been remarkably stable. Just last year at this time the stock market was in the midst of a nearly 20% decline. Here we are the very next year with the S&P 500 up by around 25% year to date at the time of writing.The S&P 500 started this decade at 1123 and is now up almost threefold at around 3150. If fear kept you out of the stock market over the past 10 or 20 years, your financial future has taken a huge hit.
Scary Times
For sure there have been some ‘scary’ market times over the past decade but stocks have weathered all of that and produced what investors need… returns with growth above inflation. Money is just a form of purchasing power and inflation is constantly eroding what goods and services our money purchases.Despite endless dire warnings and speculation, the broad stock market has continued to be a reliable place for saving for the future. For investorswho are approaching early retirement age for Social Security benefits (born in 1957), the S&P 500 has increased in value from about 40 at the start of 1957 to around 3150 today. That’s an increase of more than 78 times over that period. Inflation as measured by the Consumer Price Index has increased about nine times for this 62-year stretch.
A Safer Path?
I started out by observing that fear can be a motivator, but at times this emotion drags investors away from the path they need in favor of a path that might appear to be ‘safer.’ If the ultimate aim is to sustain your standard of living for decades past retirement, the only ‘safe place’ has historically been stocks.So, if history shows us in so many ways where to go, why do we resist? In my opinion, we succumb to the noise created by financial journalism and search for predictions about the future that will make us feel safer. Of course, this reliably fails to work.We can easily look back at almost a century of stock market returns and see the lesson that the market continues to teach us…optimism is the path to rewards. If we allow pessimism to win out it can easily derail even the best laid plans. Start there.
Related: Be Careful of the Continuous Stream of Money Narratives