Thirteen Years of Zeros – and They’re Celebrating!

January 25, 2013

Why the market’s upcoming milestones will not be gratifying for retirees


Last week, the financial networks touted two of the three major market indices – the Dow Jones Industrial Average and S&P 500 – for their recent advances to within sight of their all-time highs. The S&P 500 is now just 5 percent shy, while the DJIA is but 3.6 percent below its top mark. (Meanwhile, the NASDAQ is nowhere to be found, still a stunning 38 percent below its all-time high of 5,132.52 on March 10, 2000.)

However, what does this really mean, and why are the brokerage firms celebrating? For one thing, it means that older investors have had zero growth – zero! – for nearly 13 years, as the S&P first lost 51 percent of its value during the 2000-2002 “Tech Wreck” and post-9/11 sell-off. Then, after fully recovering those valuation levels five years later, it lost a staggering 57 percent of its value amid the “Market Meltdown” of 2007-2009, courtesy of the subprime mortgage/housing disaster. Remember that less than 8 percent of equity mutual funds outperform the market in any 10-year period, meaning that 92 percent of fund investors actually did worse during the last 13 years.

Undoubtedly, someone will point out that valuation is only part of one’s gains, and that reinvested dividends have historically played a large role in enhancing the market’s yield. While that is true, remember that stockholders usually reinvest their dividends during their accumulation years (ages 30 through 60), and begin receiving that dividend income near and at their retirements, rendering this argument far less valid if one is serving clients age 60 and older.

More importantly, what retiree will sit idly by, as the money it took them 40 years to save is depleted by half – twice in 10 years – telling themselves that such losses “are only on paper” so long as those dividend checks keep coming?

Here is a great example: Bank of America’s stock price fell from the mid-60s to just above $3 per share during the 17-months of the “Market Meltdown” of 2007-2009. However, management kept telling their principal-depleted shareholders they did not intend to cut their dividend payments. No sooner had the stock price fallen more than 93 percent did management announce they would be cutting dividends by a whopping 97 percent! Having “only lost principal on paper,” investors then lost the dividend income many counted on for their retirements.

The overwhelming majority of our own clients have done one of these two things:

  • They got out of risk-based holdings a long time ago, having lost the stomach for the “Wall Street casino,” or
  • They maintain an age-appropriate and much smaller holding in a simple, low-cost S&P 500 index fund with at least a 15-year investment horizon, usually in a Roth IRA, as the last money they will ever spend.

The bulk of their retirement savings has been repositioned into safe-money accounts – values grew when the market advanced, and principal and prior gains were protected from the volatility of the last 13 years – as well as any years to come.

Breathe easy and spread the word.


Thomas K. Brueckner

President & Chief Executive Officer

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