How Much Did You Lose?
It depends on how you look at it
By Kaye A. Thomas
Posted May 22, 2009
Taking a different view of recent stock market performance.
In a May 21 piece in the Wall Street Journal, Honey I Shrunk the Nest Egg (subscription required), Neal Templin described how his retirement savings had gone down 35% despite a conservative investment mix (50% stocks). His solution is to move to a more conservative investment mix. In other words, he's reducing the amount of money invested in stocks and increasing the amount invested in bonds. He sold some of his stock holdings when the Dow bounced back from a low around 6500 reached in March to a level above 7200, and sold more when it reached 8000.
These moves will almost surely result in a smaller account when he retires. Indeed, he's already missed out on a huge upward move on the increment of stocks he sold at 7200. To his credit, he acknowledges in a blog entry that his new portfolio mix is likely to grow more slowly, but he says that's a price he's willing to pay for greater safety.
What he's buying, though, isn't greater safety. Templin didn't give his age, but his remarks indicate his time horizon is measured in decades. Jeremy Siegel points out in Stocks for the Long Run that over longer periods of time, bonds are more likely to lose money (after adjusting for inflation) than stocks. Templin is actually buying a reduction in volatility, not a reduction in risk. In exchange for the benefit of seeing smaller zigzags in his portfolio value, he'll likely have to delay his retirement, or accept a lower standard of living in retirement, or both.
We can't place a dollar value on peace of mind, so no one can say Templin's choice is necessarily a bad one. Still, I can't help wondering if he could benefit from taking a longer view, beginning with the question of how much he really lost as a result of the stock market's recent gyrations.
He's looking at the 35% difference between his account balance at the top of the market and at the low point in March. Many others are looking at the market the same way, focusing on a peak value, and ruing every point of decline from that point as money lost. I suppose that's reasonable for investors who happened to make a major plunge into the market at or near the top, but it doesn't make a lot of sense for the rest of us.
My own portfolio, like nearly everyone's, is down from its highest value. Pulling up the five-year performance as of the end of April, though, I see that it's up about 11%, equivalent to 1.6% compounded annually (not counting added savings). That's disappointing compared with the average performance I'd expect in a five-year period, but hardly cause for concern. I'd be in the same position if the market had simply stagnated over the last five years, or if it had drifted downward through the middle of 2008 and powered its way back to the current level in recent months. For steady investors, these scenarios would have produced the same result as the actual market performance, but without leading people to feel they suffered losses.
Templin gave the wrong message to his wife when the market went down. Instead of confessing he "shrunk the nest egg," he should have explained how they would benefit from this decline. He's still pumping money into his retirement account, and stock purchases he makes in the months and (most likely) years it takes for the Dow to get back to its previous high will be less costly. He'd be a lot worse off if the market had stayed at the high level it reached earlier, forcing him to continue making those purchases at higher prices. In the long run, the market meltdown will be a huge boon to people who continue saving and investing.
