Stock Market Punishment: The First Lesson of 2013
The podcast team is giving the interns a well-deserved week off, so lucky reader….YOU get a FREE extra blog post from Average Joe. I know. Pinch yourself. It’s real. Almost like our awesome rare Saturday post this week.
Look at what the media did to you again.
The sky is falling! Fiscal cliff! Doom! Stock market will be in shambles! Hide your children!
Big ratings for the financial channels, huh?
If you listened and moved your money out of the market, it destroyed your chances for a great return in 2013.
MAYBE you’ll recover if you jumped out before the big two-day run up in stocks. The chances, though, are against you: historically, if you miss the 10 best days in the stock market, you lose about 5.18%, or nearly half your return for the year. If you paid trading fees to avoid the “fiscal cliff disaster,” this only exacerbated your problem.
Here’s what the panicked investor missed in the S&P 500 last week:
December 31: 1.7%
January 2: 2.5%
January 3: –.03%
January 4: .05%
In short, if you missed two days last week you lost out on 4.2%. Those types of returns don’t come around often.
By the way, don’t go in the comments and tell me that “all you lost was a little time….” go back and read the stats above first. You lost a ton.
let’s calculate the cost of listening to the media on this one
Suppose you’re 25 years old and you have managed to save $10,000 into your 401k plan. You lost out on $420. Sounds like no big deal, right?
Let’s use the rule of 72 to determine just how much you really lost:
The rule of 72 says that if you divide the interest rate you think you’ll achieve into 72, you’ll come up with the approximate number of years it’ll take your money to double. Cool, huh?
Assuming that you wanted this money for retirement (401k, right? That’s not your “mad money” account….I hope), we’ll use age 70 for your withdrawal. We’ll also use a realistic return assumption of 8%.
8% / 72 = 9 years for your money to double.
So, that $420 you lost wasn’t really $420, was it?
It would have doubled when you were 34, 43, 52, 61, 70.
Your “little” $420 wasn’t $420. By 32 it was $820. At 41 it was $1,640. By age 50 you’d lost $3,280. At 59 the gap was $6,560. When you went for the money at 69 you had $13,200 less.
it gets worse
If you’re 30 and gambled $50,000 that the market would tank, it’s uglier. Let’s also use 9% rather than 8%, since people looking long term historically have used 10% as their assumption (which I believe is too high, BTW).
Check out what more money and a “little” one percent difference do to your loss:
Rule of 72 = 8 years for money to double.
Funds double at 38, 46, 54, 62, 70
$2,100 lost during two day run-up in market.
= 4,200 loss at 38, 8,400 loss at 46, 16,800 at 54, 33,600 at 62 and
…$67,200 at age 70.
On our “What Did We Learn in 2012” podcast, expert after expert told you the same thing: don’t listen to national media finance porn and don’t chase short term results.
If you did, I’m going to play Dr. Phil now: How’s that workin’ out for ya?
Photo: Joe Shlabotnik