When I think about risk in investing, there’s no question that stock markets go up and down—has done it all through my lifetime and prior lifetimes. And so you have to be prepared emotionally to ride through the down markets.
You never know when the bottom is going to happen, and you never know when it’s going to reverse. So you just—I have learned over and over again—you just have to hang in there with your investments, maybe add as the markets are down.
But, you know, you begin to look around and say, "Who are the richest people in the world?" You know, Warren Buffett would be considered one of those, and he says, "I never sell."
And I have the same philosophy. I rarely ever sell unless I need the money for a kid’s education, or buying a house, or something like that.
Let’s get to know Mary, Bob and Jim, three hypothetical investors whose story can help illustrate just how important it is to say invested—even through bear markets.
Back in 1976, they each earned $18,580 a year. With a hypothetical 3% yearly raise and 10% raise every five years, by 2015 their salaries had all grown to $112,560. Throughout that time, they each saved 10% every year.
They also followed the same allocation plan for their investments, investing in model portfolios that started out more aggressive and became less risky as they aged. But when they retired at the end of 2015, there was a difference in the size of their nest eggs. Let’s find out why.
When it comes to investing, Bob was a reactor. He stuck it out through several bear markets, but in 2008 he pulled his money out of the stock market and moved it to 3-month Treasury bills.
Bob continued to save 10% each year, and for a while he stayed on track. But from 2008 through 2015, he missed out on the market gains he would have had if he’d been invested in the model portfolio, so he ended up with the smallest nest egg.
Mary is a waffler. After any year with negative returns, she pulled all of her money out of the market and kept it in 3-month Treasury bills, still continuing to save 10 percent every year. If, after two years, the market was up again, Mary reinvested in the model portfolio aligned with her time horizon. Because she took several breaks from investing, she managed to miss some further declines.
But when the market turns, it can turn quickly, and often when she bought back into the market, the price point was higher, sometimes significantly higher, than where she sold.
Missing out on those run-ups really cost her, and she ended up just slightly ahead of Bob.
And then we have Jim, the stalwart. Over the course of four decades, he stayed disciplined and continued to invest, no matter how the market performed. Because Jim stuck to his plan, riding through the down markets, he was positioned to catch the run-ups.
By the end of 2015, he had well over a million dollars, far more than either Bob, who reacted, or Mary, our waffler.
You know, so many people come to me and talk to me, "Is this a good time to invest, Chuck?" And I say, "It’s always a good time to invest. Just get started."
I can’t pick the lowest day. I can’t even pick the highest day. I just have to pick a day that’s comfortable for me, and I go in and do it. The news might be a little bit bad that particular day. That’s OK. The market might be down. May be a perfect time to get yourself started and rolling. And then be prepared to add to it over—over your career.