What Happened To My Life Savings?
I'm sure that you’ve heard that investing in the stock market is like going for a ride on a roller coaster. While we seem to accept that notion, most roller coasters aren’t quite as scary as the one we’ve been on for the past ten years.
How did we get here? In the late 90’s we enjoyed the safety and exhilaration of hearing the clank, clank, clank of our roller coaster ascending. Times were good. The markets kept going up as did our net worth. Many started planning early retirements, exotic vacations, and beach front houses. We were so excited that we didn’t stop to realize just how high the first hill was taking us. When a roller coaster goes up, you can only see the heavens. You’re lulled into a false sense of security because you can’t tell if/when you’ll go down and just how far the drop will be.
From 2000 to 2002 the bottom fell out. During that span of time, we experienced one of the worst stock market declines ever. Our stomachs were turning as the coaster took its turn and our net worth began to fall seemingly faster than it grew. Suddenly people were postponing retirement or rejoining the work force.
As the market started to rebound in 2003 and the roller coaster began its second ascent, we all held on cautiously as we weren’t going to be fooled again. We learned our lessons. Going forward we were going to be investing only for the long-term and we were going to have diversity. We weren’t going to get greedy!
While many continued on the stock market coaster convinced the ride would settle going forward, others had enough of that ride. They decided that they had found a ride that would only go up, so they invested in real estate. They used low interest loans to update their homes, purchase second homes, or to flip houses. This, after all, was much safer than investing in the stock market because real estate is a hard asset. Everyone needs a place to live and everybody had the belief that their neighborhood was going to continue to be strong forever. Once again they enjoyed hearing the clank, clank, clank of their new ride climbing.
As interest rates began to increase and housing became abundant, the value of real estate began to fall. Suddenly people were stuck with properties without buyers or, if they did have buyers, the buyers wanted to pay much less than the owner could afford. The housing market’s ride began to fall. Once again, the ride took nose dive.
While the real estate market was booming, those who stuck by their stock investments were pleased to see their investments growing as well. As the real estate market began to decline, they felt insolated from the losses. Unfortunately, they forgot just how high their own ride had climbed and are now suffering from the same stomach churning as those who invested in real estate.
The question everybody is now asking themselves is: what happened to my life savings? People are thinking that they would have been better served to put all of their money under the mattress over the past ten years than they would have been in either the stock market or real estate.
Where do you go from here? You’re probably as tired of hearing “stick to your plan” and “you’re in it for the long term” as I am of saying it. So let’s skip that part. We also can’t worry about what do to avoid this the next time around because you’re likely too focused on how you’ll make back your money.
I think the best thing to do is to start fresh. I know that’s difficult given the pain you’re feeling. This is, however, a time to reassess what you’re doing and why you’re doing it. Sure, selling at the “bottom” isn’t the best way to get your investments to the level they were in October 2007, but that happened a year ago. It’s time to throw out that statement and reset the account balance in your mind to today’s level. For all we know, it could take years for the market to get back to where it was last year.
Sit down with your advisor and discuss your goals. What are your plans for the money you have saved? Remember that retirement isn’t a one time purchase. It’s the start of a new long-term income stream, so you’ll likely need some level of stock exposure throughout retirement. When will you need to begin to access your money? If you’ll need the money in the next few years, then you might be taking too much risk. If you won’t need it for another 10-20 years, then don’t stress so much. You’re likely to see your investments increase and decrease again before you retire.
Many of us take our investment “temperature” when the market is doing well, so it’s no surprise that too many people are taking too much risk with their investments. When the roller coaster is on its way up, people have no problem with risk because they can only see up. When the roller coaster is on the way down, that’s when people decide that they no longer want to be on the ride. That’s when they say that they wish they hadn’t hopped in line and when they begin to pray that they’ll make it through until the end. By taking your “temperature” now, you’ll know how you felt when the market was going well and you’ll know how you really feel about loss. Knowing both extremes will help you determine where your ideal portfolio lies.
These are the times when advisors should be at their best. While advisors and stock brokers might not like me writing this, just about anyone can make money when the market is up. It’s the advice you receive during an emotional event that separates us. If you panic and sell everything when the market is down, you’re likely making a huge mistake. You should receive guidance during these times, so don’t be afraid to ask for it. Call your advisor and schedule a meeting to discuss your concerns. Be honest. No one can give you great advice if you’re not honest with the facts.
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