NASDAQ 5000 Hoopla

Mar 5, 2015 by

The NASDAQ stock index’s all-time record close of 5,048.62 occurred March 10, 2000. Then the bubble deflated, as all bubbles do. On October 9, 2002 the NASDAQ closed at 1,114.11, after a mind-boggling, retirement-crushing, small investor-punishing drop of 78% in just 31 months.


Back to Even After Fifteen Years

Investors who bought into Wall Street’s dot-com hype during the 1990s and have since adhered to Wall Street’s self-serving advice to buy and hold may be about to get back to even—after fifteen years.

Imagine if in 1999 you’d embraced yet another standard stock pusher recommendation (“You could live another 30 years! Only stocks beat inflation!”) and, at age 65, invested in NASDAQ stocks half of the funds you’d diligently spent a career saving for retirement groceries and electricity. Now you’re 80, and you’re finally back to even on your NASDAQ investment. Except you wouldn’t be because you would have had to cash out the piddling remainder of your NASDAQ investment to make the payment on your mobile home lot.

Or imagine if in 1999 you looked forward, at age 50, to retiring in fifteen years. Like our 65-year old retiree above, you were only doing what those smart financial advisers on CNBC were suggesting by plowing a big chunk of your 401(k) funds into NASDAQ stocks. After all, companies like were using the Internet to change the rules of business, right? Today you’re 65 and retirement remains years away. You’re working still to earn back the money you lost when the NASDAQ dropped by 78% in the early 2000s.

But see, Wall Street was right again: stocks always come back. Eventually.

fortune teller with crystal ballStocks Outperform Everything in the Long Run

You’ve heard it: stocks outperform everything, in the long run. The problem with this argument is that humans are mortal. The typical earning and saving lifespan of people fortunate enough to stay healthy and employable is 40 or 50 years. Millions of Americans in the past century who invested in stocks did not live long enough to see their stocks generate a competitive, or even positive, return. The ballyhooed long run over which stocks outperform everything unfortunately ended after they were dead.

When stocks prices are falling, the airwaves overflow with stock pushers advising investors to stay the course and not panic. But imagine yourself in these circumstances (millions of Americans don’t have to imagine—these were their circumstances):

George & Mary
A 50-something couple—George and Mary—had used IRAs and 401(k)s to accumulate a tidy retirement nest egg, the lion’s share of which they’d used to buy stocks, obediently following Wall Street’s advice. In 2006 they planned to retire in 2013 at age 62. Their financial advisor confirmed that they’d done a good enough job of saving over their careers to make possible a 2013 retirement. They were excited.

Then the 2008 financial crisis hit. From October 2007 to November 2008, stocks crashed by about 40%. Stock indexes plummeted over 10% on two different days in October 2008. By the fall of 2008, the value of George and Mary’s retirement accounts had tanked by 25%. Media pundits were speculating about a meltdown of the entire financial system. Federal Reserve Bank Chairman Ben Bernanke told Congressional leaders on a Thursday that if they didn’t authorize $700 billion in bailout cash on Friday, there’d be no (U.S.) economy on Monday.

George and Mary watched in horror as their retirement savings steadily dwindled during 2008. But despite tremendous and debilitating stress, they continued to follow the standard Wall Street advice to stay the course. By the fall of 2008, with the headlines filled with dire warnings and stocks still sliding, they considered two options, both ugly: 1) sell their stocks and postpone their retirement until age 70 to earn back their 2008 losses, or 2) do nothing and run the risk of never being able to retire to the lifestyle they wanted and had worked 40 years for if stocks fell further and failed to recover during a time frame that would matter to them. George and Mary chose to sell, and I would have done the same.

Stock values have recovered since 2008’s debacle, and with the benefit of hindsight George and Mary would have been better off to hold on their stocks. But under enormous stress, they opted for a known, if dismal, outcome—delaying retirement eight years—instead of hoping for a better, but highly speculative, outcome.

Eugene & Carol
Now imagine Eugene and Carol: retired 73-year olds, they lived modestly on Social Security and carefully planned withdrawals from their retirement accounts. Based on the advice of their financial planner (again with the “You could live another 30 years!”), half of the couple’s nest egg was invested in stocks. By the end of 2008, the value of their retirement fund had dropped by one-quarter. But the amount they needed to withdraw monthly from their account to help pay living expenses had of course not changed. So each withdrawal now dinged their nest egg much more deeply.

In the fall of 2008 Eugene and Carol faced a very grim set of facts: unable to return to work and based on the current value of their retirement savings, they might well outlive their nest egg, unless they drastically reduced their already modest living expenses. And if stocks fell further and did not recover within the next few years, they’d be facing a genuine crisis. They did what most of us would do I think: they opted for a known bad outcome to avoid a possible catastrophic outcome. They sold their stocks and considered whether to put their house up for sale and relocate to a mobile home.

Stock pushers might comment on these examples thusly: “See—if they’d just stayed the course as I recommend instead of panicking, they would have been fine.” The “long run” in which stocks purportedly always recover happened quickly enough in this most recent Wall Street calamity that these couples’ nest eggs would have been restored within about five years.

But our two couples lacked a functioning crystal ball.

What if a decade or two passed before stock prices recovered? Thirty years passed before the Dow Jones Industrials Index recovered to its 1929 peak, and in the fall of 2008 there was much speculation about prospects for another Great Depression. Everyone said the 158-year old firm Lehman Brothers could never go bankrupt. But in 2008 it did.

In short, the lives of these two couples would have been wrecked if they followed the standard “stay the course” pablum and stock values didn’t recover in a time frame that would make a difference to them. We humans must make decisions based on an uncertain future. I think 9 people out of 10 would—and in 2008 millions did— make the same choice that these two couples made under the same circumstances. Though driven in part by (well founded!) fear, their choice to sell was rational.

We can believe stocks will always recover and push higher in the long run, but we can never know when that long run will come and save us. While waiting helplessly, we may run out of money at the most financially vulnerable part of our adult lives: when we’re retired and unemployable.

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