Good morning & happy Monday!
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”
Phillip Fisher, American investor (1907 – 2004)
Last week’s Monday morning memo stated the following:
When we cut out all the noise, there are only one of two options that will happen in our financial lives and in the financial life of every person. Either:
- Your money will outlive you or
- You will outlive your money
Last week we talked about 2 hypothetical scenarios: one where an investor bailed from the market in 2008 and one where an investor stayed with the investment through the ups & downs. The investor who bailed from the market at the end of 2008 ran out of money, the investor who stayed put had more money than he/she started with all while drawing an increasing level of income.
Today, I would like to talk about risk. I have heard countless times in my career “the stock market is too risky.”
My simple question in response: compared to what?
Sure, the stock market can fluctuate in value on a moment-by-moment basis Monday-Friday 9:30am-4pm EST. Does that make it risky? I suppose that depends on what your definition of risk is.
To me, the fundamental question in regards to risk really boils down to one simple question: “What is the risk of one of my clients not meeting their financial objectives?” That is the risk I want to manage.
As we often do in these emails, let’s look at an example.
For this example, let’s assume that I retired 15 years ago, I have saved $1,000,000 for retirement and that I need $50,000/year in income from that account and that I need that income to increase by 3% per year for inflation (same assumptions as last week). Let’s also assume I am completely uncomfortable with risk and decide instead to purchase fixed rate instruments: for this example we will say I earn 2% in bank CDs.
What happens to my asset base in this example:
So, in this example I enter 2022 in my 16th year of retirement with an asset base that started at $1,000,000 and now is only $285,381. I will still need income ($77,898 this year) off a rapidly decreasing asset base. This puts me in great jeopardy of running out of money in retirement. In my attempt to not take risk (avoid the stock market) I now find myself in a very risky position of potentially running out of money.
So, when people say “the stock market is too risky” I would simply point to an example like this and state “compared to what?”
Let’s summarize the last 2 weeks of Monday morning memos. We looked at 3 different investors:
- One investor stays in market for all the ups & downs for the 15 years from 2007-2021
- One investor bails from the market at the end of 2008 and sits in cash for 13 years
- One investor has all assets in bank CDs paying 2%
I know that’s a lot of information, and a ton of numbers. I’ll plan on something a little less data intensive next week 😉 but I just feel it is so important to put some perspective behind various investment approaches and the true risks involved.
Thank you for your time in reading this message and for the trust you have placed with my team and I … it truly is an honor.