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Poor Equity Results Over the Last 10 Years, May Be Good News for the Next 10 Years

Throw out all the politics and economics – Just look at history.  History shows that disappointing 10 year periods for stocks, though rare, do occur.  While such stretches can test an investor’s conviction, long-term investors should recognize that these poor periods have always been followed by periods of recovery.  This important concept is illustrated in the chart below.  The tan bars represent the worst 10 year stretches for the market since 1928. The green bars represent the 10 year average annual returns that followed these difficult periods.

In every case, the 10 year period following these disappointing stretches produced satisfactory returns.  For example, the disappointing 1.2% return for the 10 year period ending in 1974 was followed by a 14.8% return for the 10 year period ending in 1984.  Furthermore, these periods of recovery averaged 10% per year.  Hint:  Look at the far right of the chart – 2002-2011 were pretty lousy.  While no one knows what the next 10 years will bring, history shows that investors with long-term goals should consider maintaining or adding to their stock holdings after a prolonged period of poor market returns. 


Is an IRA Going to Become Mandatory?

If you don’t save for retirement, may the government be able to force you to?  I’ve got my eye on a bill that has been approved in CA. only waiting for IRS and Dept. of Labor blessing to become law.  The California Secure Choice Retirement Savings Program, introduced by State Sen. Kevin de Leon, D-Los Angeles, seeks to provide a pension for workers at firms that do not have 401(k) plans but have at least five employees.  The program would deduct 3% of their pay and then, cutting out the financial services industry, invest the funds of these millions of workers in a state-administered investment pool that claims it would guarantee a modest 3% return.  The accounts would be underwritten by insurance companies so as to avoid taxpayer risk and upon retirement, workers would receive a pension annuity.

Three Percent?  How in the world will your retirement assets ever grow at 3%?  I understand the intensions are good but with inflation growth of 2% per year, that leaves 1% for growth of assets.  In this ThinkAdvisor  article, I agree with columnist Megan McArdle who expressed skepticism about this bill.  Using an annuity calculator and inputting best-case work history assumptions, McArdle found that the average low-income worker would be adding a quite measly income supplement during retirement based on the limited contributions and tiny guaranteed return. “Guaranteeing a benefit is really, really expensive,” McArdle says.  Perhaps with the assistance of a financial professional you could invest the 3% suggested mandated contribution outside of this plan and aim for higher returns that could keep you ahead of inflation.  That makes much more sense to me.  If you are going to make saving for retirement mandatory at least give the funds a chance to do what they are intended to do.


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Comment   |  6 years, 6 months ago from Sugar Land, TX