Investment Basics: Put the Past in Perspective
November 6, 2017
By Colin OShea
Does the stock market make you nervous? Many investors are wary of investing in stocks, especially younger investors. After the stock market crashed in 2008, many people moved money out of stocks and into bonds and cash alternative investments. Almost ten years later, many still believe stocks are a risky investment.
However, completely avoiding stocks might be a riskier long-term investment strategy. Retirement investors should put past stock performance into proper perspective.
Historically, the economy and stock market tend to be cyclical. Downturns in the past often have been followed by periods of growth. Investors who didn’t move their money out of stocks during previous lows had the opportunity to see their investments benefit from market increases.
For example, from 1987 through 2016, the stock market* had years when it was up — 37.57% in 1995 — and years when it was down — -36.99% in 2008. Yet, $1,000 invested at the beginning of 1987 and kept in the market for the entire period might have grown to about $18,234. In contrast, a $1,000 investment in cash alternatives over the same 30-year period might have grown to just over $2,767.**
Losses on Paper
It’s also important to remember that a paper loss doesn’t become “real” until you sell the investment. If you stick with the investment and it later rebounds, the paper loss may be erased. Investors with a long time horizon until retirement generally have time to ride out any low periods in the market.
Impact of Inflation
Avoiding stocks and putting all your retirement dollars into less volatile investments, such as funds holding bonds and cash alternatives, may put your portfolio at risk of not keeping pace with inflation. Over time, inflation increases the prices of the items you buy. Those price increases can make a big difference in your budget and reduce the buying power of your retirement savings. Stocks historically have offered higher long-term returns than the other major asset classes. While past performance does not guarantee future results, including stock investments in your portfolio may help you stay ahead of inflation.
Your situation is unique, so be sure to consult a Security National Bank Wealth Management professional before taking action.
* As measured by the S&P 500, an unmanaged index of the stocks of 500 major corporations.
** The stock example is based on a hypothetical investment earning the same annual returns as the S&P 500, which carries no expenses. You cannot invest directly in an index. The cash equivalent example is based on a hypothetical investment in three-month U.S. Treasury bills.