If you’re thinking of pulling your 401(k) out of the stock market or are too terrified to invest more, you need to meet my friend Betty Badluck.
Poor old Betty had the worst luck of any stock market investor you’ve ever met. Over the past 40 years, she has only invested in the stock market six times. And each time, his timing was an absolute disaster.
The first time Betty invested in stocks was in late September 1987. She blamed herself for missing out on the big boom of the 1980s, and when stock prices began to fall at the end of the summer, she figured it was the perfect time to buy the dip. . She invested $400, or (adjusted for the consumer price index) exactly $1,000 in today’s terms.
A few weeks later, on October 19, the stock market staged its biggest one-day crash in history, eclipsing even the worst day in 1929. Betty saw a quarter of her money wiped out in the blink of an eye.
Well, after that experience, she didn’t want to go near the stock market for years. It wasn’t until 1990, when the market fully recovered, that she had the courage to invest more in stocks. On July 31, 1990, she invested another $450 in the stock market, which (again) is equivalent to $1,000 in today’s money.
A few days later, Saddam Hussein invaded Kuwait. Oil boomed, the stock market crashed and the world went into crisis.
Once again, Betty kicked herself as she watched some of her hard-earned money disappear before her eyes.
She said to herself, fool me once, shame on you – fool me twice, shame on me. So, after these two disastrous experiences, she gave up the scholarship altogether. And that was years before she had even thought of it. But throughout the 1990s, she saw the
up, up, up, up. They even ran TV ads bragging about how high the Nasdaq was. And eventually, it wore Betty out. Finally, after many years of refusing to throw another penny into her 401(k), she relented. And on July 31, 1998, she invested another $560 (that’s $1,000 in today’s money).
A few weeks later, Russia defaulted on its debts, triggering a global financial crisis. A giant hedge fund called Long-Term Capital Management imploded, even though (Peanut Gallery: “Ha ha ha!”) it had several Nobel laureates on its border. Everything collapsed.
You get the picture. Poor old Betty Badluck. She didn’t give up. But each time she found the courage to invest in stocks, it turned out to be a terrible, terrible moment. So she bought in late March 2000, which turned out to be the peak of the long bubble and the start of the longest bear market since the 1970s. She bought it back in late August 2001, just before 9/11. And she bought more stock in late August 2008, just before Lehman Brothers went bankrupt.
His timing literally couldn’t have been worse.
But Betty did two other things.
The first is that she didn’t try to pick stocks, funds, or even markets. She invested in a global equity portfolio that matched the MSCI World Index, including US and foreign stocks.
And after investing her money and watching it go down…she left it there.
What happened to Betty?
Well, thus hangs a story.
She did well.
Even though she picked the six worst times since the 1980s to invest, she made an average profit over the next five years of 20% and an average profit over 10 years of 100%. She doubled her money. Despite her disastrous and terrible timing, she was in the black after five years four times out of six, and in the black after 10 years 10 times out of 10.
Today, even though the total cash outlay of these six investments only totaled $3,500, his portfolio is worth $17,500. That’s more than five times his investment. And that’s even taking into account this year’s losses, which saw the global stock market — and Betty’s portfolio — drop 22%.
Adjusted for inflation, Betty’s portfolio is worth three times what she invested.
And remember that this is not an average return achieved by an average investor. This is the long-term return achieved by the absolutely unluckiest investor in modern history. If you’re too scared to invest in stocks right now because you’re understandably worried that the market will continue to slide, ask yourself: do you think you’d be as unlucky as Betty Badluck?
In fact, the global market has already fallen by more than a fifth, so it’s impossible for you to time things as badly as Betty. You can’t buy upstairs as we are already a good distance away.
I have absolutely no insight into the next month, three months or three years. I don’t know which markets will do better and worse, and by how much and when.
(Nor, by the way, anyone else. If you don’t believe me, come back in a few months or years and let’s look at all the predictions.)
However, I can remember only a few times in my career when people on Wall Street panicked as much as they do today: October 2008 and March 2020. Both turned out to be good times to buy.
Most importantly, people saving for retirement aren’t looking to make money on stocks over the next few weeks or months (lovely as that may be). They’re looking to put some money aside so that in a few decades, when they get tired of work and want to smash their laptop and retire, they can open their 401(k) statement and see with great pleasure and surprise that they have accumulated a large pile of money.
In this case, they really have no excuse not to buy right now. And if they don’t know, just
Vanguard Total Global Stock
(ticker: VT), or a mix of, say, 40%
iShares MSCI USA Equal Weight
(EUSA) and 60%
Vanguard FTSE All World outside USA
(VEU), will be better than nothing.
I bet they won’t be as unlucky as Betty Badluck.
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