INVESTING: Age is more than just a number in investingIt's a tale of two generations. When the stock market is careening downward, people worry about losing money and wonder about their next move. But young and old shouldn't be focusing on the concerns of the other.
By: Gail MarksJarvis, Chicago Tribune
It's a tale of two generations.
When the stock market is careening downward, people worry about losing money and wonder about their next move.
But young and old shouldn't be focusing on the concerns of the other.
Take new college graduates who are entering the job market.
When speaking on college campuses to students about to graduate, Beth Kobliner, author of "Get a Financial Life," a personal finance book aimed at people in their 20s and 30s, finds many are shocked when she tells them to start a 401(k) immediately after starting a job.
"They tell me that their parents have lost a lot of money in their 401(k)s, and they don't want to lose money too," Kobliner said.
The students do not realize that a loss in the stock market at 22 is not the same as a loss at age 50 or 60, and that even the most fearful young investors can find choices to insulate them from the rage of a nasty market.
On the other side are people about to retire or just retired. One in four of these people was thinking more like a 22-year-old before the stock market began to crash late in 2007. They had 90 percent or more of their 401(k) money in stocks, thinking they were the right investment for a "long run" they misjudged.
Here's a more sober view:
THE OPPORTUNITY YEARS
The last 10 years illustrate what can go wrong with stock market investing. Assume that on the first day of 1999, you invested in a mutual fund that mimicked a key market benchmark, the Standard & Poor's 500 index. After more than 10 years, you would have about 10 percent less money than when you started, if you had reinvested dividends.
Most would think that 10 years is the long term, but 20 or 30 years is better. If you began investing in 1989, your money would have grown about 419 percent with dividends, according to Ibbotson Associates.
Clearly, time frames matter. This is why you hear professionals talk about your "time horizon," or cutting back on the risk of stocks as you move closer to retirement. Investors cushion the blows of the stock market by holding bonds too.
Bear markets, or losing periods like the last couple of years, occur on average roughly every four years. But you don't know when they will arrive. Likewise, bull markets sneak up on people who've lost a lot and may think scary times will last forever.
This bear was no exception. In 2007, people were feeling rich as stocks and homes soared in value. Then, home prices started to plunge, and the stock market dropped more than 50 percent.
It was worse in the Depression, when the stock market dropped 83 percent. Still, a $10,000 investment in the stock market would have been worth $14,500 two decades after that crash began, according to Ibbotson. A 25-year-old who invested $10,000 just before the 1929 crash would have had about $210,000 40 years later.
Young investors can cushion a bad stock market by buying stock and bond mutual funds in a 401(k). If investors had divided their money half and half at the beginning of 1999, they would have made about 40 percent since then.
THE SERIOUS YEARS
People about to retire, or in retirement, might not have the luxury of time to regain losses.
Instead, Denver financial planner Charles Farrell suggests individuals think about what they can control: retiring later than planned, saving more in individual retirement accounts and 410(k) accounts and delaying Social Security payments.
Every year between ages 62 and 70 you wait to take Social Security provides about 8 percent more in your checks. That's more than you are likely to earn each year on a 50-50 mix of stock and bond funds.
Most important, don't spend money without understanding the implications. According to a T. Rowe Price analysis, people 60 to 69 on average remove 9 percent to 10 percent of their savings per year; numerous studies show that using 4 percent, with annual inflation adjustments, is advisable.
A retirement income calculator at www3.troweprice.com/ric/ric/public/ric.do shows what you can afford to spend from your savings. Also, figure how much you will get from Social Security at ssa.gov.
ABOUT THE WRITER
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery." Readers may send her e-mail at email@example.com.