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
Thanks a lot for these depressing numbers, Joe!
It’s only depressing if you listened to the media and jumped off the bus. I’m sure you and Greg stayed in the game!
Yes, we didn’t do anything =)
Gold star to you!
Did people actually take money out of the market? Most of the talk I read was about resetting basis (selling to create a taxable event and then rebuying right away).
I was actually hoping for a small dip, as I have $40k or so I am trying to get into the market. I may just start nibbling here and there until I eat the whole meal.
Ha! Funny…have you been an advisor? Every advisor in the country was asked “should I sell before the fiscal cliff?” about a bazillion times in the last month, and this was clearly fueled by the media outlets. Like you, it amazes me that people think that way….and that they don’t understand the cost associated with that in/out action.
I also had some money I was hoping to invest in a dip! I didn’t get it, so we’re dollar cost averaging it into our asset allocation.
Me?! An FA?! HAHAHAHAHAHAHAHAHAHAHA!!!
I like my spine….;)
Please stop commenting while I’m drinking tea. It tends to end up on my shirt when you do that.
I was fairly sure something would pass and the markets would have a rising January. I think this turmoil and overblown media coverage is scaring people from entering and staying in the market.
Man, I totally agree, Brent. It’s frustrating to watch all this money on the sideline when the financial markets have performed this well. Plenty of people missing out on good returns.
The market popped? I wasn’t paying attention this past week.
Good week to be away, Andrew. End result = stay put.
I didn’t miss out. Glad I don’t have TV, lol.
The media is really bad at skewing the truth. They don’t mention the power of compounding can work against you. And most people in their 20s today will probably go on to live longer than current retirees so there’s even more opportunity lost over time if they pulled out of the market. Keeping cost low is important when investing. Putting money in and then taking money out of the market doesn’t help lol.
Why is it that Albert Einstein’s greatest force in the universe never makes it on CNBC?
I was moving money out of a too risky asset and finished selling off on January 2nd… After that big rally I didn’t want to be around later on when Congress starts fighting again. My money needed to be in a more conservative investment anyway.
You finished your asset allocation selling on January 2? …meaning that you captured the two day run-up? Brilliant.
Some would say that… others would say lucky… others would be sad that all of my selling didn’t wait until January 2nd. Regardless I’m happy I’m no longer in a too risky investment and I still made plenty 🙂
Investing in general is a long term process. If you think you can time the market, you better be real good. Let’s face it, no one can possibly be right all the time. If you are going to time the market, you have to be!
Lets see Gold and silver safely returned you 7%+ in 2012. I don’t understand why stocks are a better investment? Sports gambling maybe better.
You could loose big time and all you get is a piece of paper.
With gold you could still sell the bulk metal and mark it up via retail channels.
Consider this. One silver ring weighs less than 5 grams and sells for over $100. One silver ounce contains 28 grams.
You do the math.
Sorry, I don’t get your reference to precious metals. What math are we supposed to do?
Stocks outperformed 7% in 2012 and gold/silver are 3x more volatile than stocks.
While I like precious metals as an investment, they aren’t a “safe haven” investment for traders. If you’re keeping it? Sure….but then so are stocks and real estate.
…and remember that you don’t just own paper. You own part of a working company with stocks.
See, and here I was with some extra fundage set aside hoping that the market was going to drop by a nice solid 10-15% going into the fiscal cliff so I could pick up some shares on the cheap. Guess it’ll have to go in as scheduled instead. =(
I’m there with you, Mrs. PoP. Part of me hoped the calamity would give me a big fat buying opportunity.
I’m sure they will blow it all out of proportion again before March 1, so if you missed your chance to panic this go round, you’ll have another opportunity.
Ha! Right on, Kim! Always another chance to step in the dog shit.
Sometimes it’s better to turn off the news and be ignorant…it can pay off 🙂
Really, the people that panicked need to look back at past crises. When the credit rating fell, some people were panicking. Stocks came back up. Heck, after the tragic Tsunami in Japan, the Nikkei plummeted over the next few days…only to come back strong over the next few weeks. Being reactionary and selling out can be dangerous!
I had clients for 15 years that would panic every time. In fact, I developed a “panic list” that I’d call in order every time the news turned ugly. Some people had to be walked off the ledge every. single. time.
You make a great argument for the opposite, too: these are excellent times to prey on the sheep. I don’t like preying on horrible situations, but I love taking advantage of idiots who send the market lower when this stuff happens.
You mean I am not supposed to listen to the talking heads on CNBC/CNN? I just got too worried and put all my money under our mattress. 😉 I wonder what they’re going to come up with to scare us in a few weeks when the do nothing Congress meets the can they just kicked down the road.
I’ve wrote about investing in my book, Moneylicious. I expalined how in order to grab a piece of the markets upswing you have to remain invested. Of course this doesn’t mean you shouldn’t have an appropriate asset allocation mix relative to your investment time horizon.
I loved your advice on the podcast, too, that applies to this particular problem: ignore the national media hype.
I like reading posts that validate my “put money in my IRA and don’t think about it ever” idea. In fact, I’d like to fill my days finding posts that simply validate my opinions. 🙂
That is not too bad to hear I think it is normal. It is good for you that you are going to have your first lesson this year so be it.