Roller Coasters and Retirement

Feb 25, 2013 by

roller coaster

Is stock investing now for thrill seekers only?

A couple of weeks ago I wrote about my observation that the Wall Street bandwagon once again is rolling and playing a happy tune. The post attracted some excellent comments, and none questioned publicly my sanity or called me names. So I’ve got that going for me.

But as thoughtful, constructive comments are supposed to do, they inspired in me—and I hope in Money Counselor’s readers, since that’s a goal of this blog—more reflection on the topic.

S&P 500 Index Chart Since 1950

I published in the Bandwagon post this chart:

S&P 500 Index chart

S&P 500 Index 1950-2013

I don’t have a statistics education, but to my untrained eye a conclusion seems self-evident: The stock market’s behavior has changed—dramatically—since about 1995:

1950 – 1995: Boring—slow, steady gains with little drama.

1995 – today: Bubbly—steep, multi-year price increases followed by harrowing crashes.

Remarkably, over roughly the same period that stock prices have become so bubbly, the Wall Street marketing machine has succeeded neatly in creating the conventional wisdom that everyone must—to have any hope of retiring comfortably—invest the lion’s share (70%? 80%?) of their savings in stocks.

How do we reconcile these two phenomena?

→ Stock investing clearly has become riskier over the past 20 years.

and

→ Over about the same time span, just about everyone seems to have become convinced that stock investing is pretty much the only way to go when saving for retirement.

Huh? I don’t get it. With respect to a goal as critical as having enough money to live comfortably when you’re old, shouldn’t we be repulsed by, not attracted to, risky behavior that seriously jeopardizes achieving the goal?

Why Have Stock Prices Become Bubbly?

I’d love to hear readers’ views on why the stock market has changed (if you agree it has). I published mine some time ago in Why I’m Wary of Stocks? (That article really stirred up a few ‘true believers’!)

Is Conventional Wisdom About Retirement Investing Wise?

A few questions:

  • Do you agree stock prices have gotten bubbly and therefore stock investing riskier?
  • Looking at the graph since 1990, how do you get comfortable with sinking a big percentage of your retirement fund (and more) into anything characterized by this sort of price volatility?
  • Is stock investing for retirement now essentially an act of desperation—it’s our only hope—in which we roll the dice that a bubble is inflating, not deflating, when the time comes to sell so we can withdraw our money to buy groceries and prescriptions?

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