What to Expect From Your Investments

My parents were children of the Great Depression and, like many people of that era, they were and are careful with money. While extraordinarily generous to their children, grandchildren and to their beloved charitable causes, spending money on a luxury just for themselves still requires breaking decades of money muscle memory. Surveys during the 1960s showed that people who were young during the Great Depression were not only, like my parents, extremely careful with money but also quite risk averse. Not surprisingly, this aversion to risk made this generation much less likely to invest in the stock market.

Alarmingly, new Gallup survey data shows people who were starting their working lives during the 2008 financial crisis and Great Recession have a similar view of investing and the stock market. In fact, significantly fewer people in their 30’s and 40’s are invested in the stock market than those same ages were before the crisis. Why is this notable? Because, as stock mutual funds have historically been the engine that powers people’s retirement plans, an aversion to these funds can impair people’s ability to accumulate enough for their retirement.

Now, we know many young employees are invested through their workplace retirement plans – but are they investing in what will be in their best long-term interests? Are they avoiding riskier investments like stock mutual funds to their own detriment?

Here is a view of the average annual returns of some major investment types from 1926 through 2015:

• Treasury Bills                       3.42%
• Long-Term Gov’t Bonds      5.28%
• Long-Term Corp. Bonds      6.07%
• Large Company Stocks        10.12%
• Small Company Stocks        12.48%

Clearly, over the long haul, stocks deliver the highest returns. As you might expect, the investment types that return more on average, like small company stocks, historically demonstrate more volatility too – more ups and downs. That’s why we diversify our portfolios – to smooth out those up and down swings. Although we can’t predict how these asset classes will perform in the future, avoiding those riskier asset classes such as stock mutual funds can potentially leave people short of their long-term savings goals.

For instance, if a 35-year old UK faculty or staff member saved $12,000 each year (including the UK match) for 25 years and earned 7% on average each year, their retirement account would be worth $758,988 at age 60. If that same person earned just 4% on average each year because they avoided the higher returns of stock mutual funds, their retirement account would be worth just $499,750 at age 60. That’s a difference of more than $259,000. Holy shortfall, Batman!

When the stock market was falling faster than Wyle E. Coyote’s anvil during 2008-09 it actually declined a little more than 50% from peak to trough. A portfolio invested 100% in stock funds would have taken three years to recover. If one’s portfolio, though, was split 50/50 between stock funds and bond funds, the portfolio would have lost only about 29% and recovered all of its losses in about a year. Stock mutual funds are important – so is proper diversification.

Lesson: Stock mutual funds are a must for almost every portfolio because, historically, they have provided the returns necessary for people to reach their goals. Just like your Mom taught you, however, “everything in moderation”. So, take care to structure your portfolio with the proper mix of investments based on your specific circumstances and goals.

Steve Byars, CFP®