How can I call the stock market the second biggest financial scam of the twentieth century if I am quoting numbers that are on the face of it pretty good? For four reasons:
1 ) because the true CAGR going back to 1950 is much lower 7. 47 %. It will take the average American worker 25 years and one month saving $10, 000 per year to accumulate one million dollars in wealth as long as the market achieves CAGR of 9. 71 % and in 29 years 2 months if forced to accept the longer term returns of the market. These numbers leave very little margin for error for the average American worker. Retirement projections for the most part are based on returns that have existed at only one point in the stock market’s history since 1950;
2 ) because the same laws that facilitate the transfer of individual investor money into the stock market also mandate its withdrawal at a specific time which is tantamount to what all financial pundits have called a money losing strategy, Market Timing. In other words the laws governing tax - deferred savings mandate that withdrawals begin at age 70 and a half at the latest forcing retirees to time the market to determine their exit;
3 ) the time horizon for capturing meaningful gains from the market is long indeed, at least 30 years. To quote Mr. Swenson, “Returns of bonds and cash may exceed returns of stocks for years on end. For example from the market peak in October 1929, it took stock investors fully twenty - one years and three months to match returns generated by bond investors. ”
Charles Farrell, an adviser with Denver’s Northstar Investment Advisors, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30 - year periods, starting with 1926 to 1955 and ending with 1977 to 2006 “But here’s what’s interesting: The Majority of your wealth would almost always have come in the last 10 years. Mr. Farrell calculates that, on average, you would have notched 8 % of your final wealth after the first decade and 32 % after the second. In other words, 68 % of the total sum accumulated was amassed in the last 10 years. ” ( Wall Street Journal, Jonathan Clements November 21, 2007 );
4 ) because current marketing strategies by financial pundits, gurus and Wall Street treat stock market investing as a money in, money out proposition obscuring the true risks of investing and the true time horizon needed to accumulate wealth. In other words, the money needed for retirement must be invested for an extended period of time, roughly 30 years. It cannot be borrowed against. It cannot be used to buy a home, car, pay for college or a child’s wedding.
It can only be used for retirement 30 years hence. Any other needs must be paid for from an additional source other than retirement savings. Most people lack the financial education to understand this and blindly chase market returns hoping for a big score.
Fortunately there is a simple solution, but like most simple solutions this one requires work and financial education. I will introduce this simple solution in part 3 of this series.
Disclaimer: This is a thought - provoking article that draws upon real world examples, articles, books and websites that are readily available to the public. This article is not intended to offer investment advice. Any actions that you take in the market place should be the result of your own financial education and consultation with a licensed professional. Financial calculations were accomplished using the savings goal calculator found at Bankrate. com unless otherwise indicated.
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