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.


→ 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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  1. I think that vast majority of investors, including me, don’t know where else to “put” money. Interests rates are terrible and it doesn’t quite seem safe to put it under the mattress.

  2. John S @ Frugal Rules

    I agree that the bandwagon is rolling along and that quite a few pundits are optimistic. However, I do not see any other real source to grow one’s money right now. Rates are terrible, so that is not a real option. The other option might be real estate, but I would be hesitant to go head first into that.

  3. Hi Mary & John: Your logic seems similar, and I hear you. Earning 1% on cash is uninspiring, to say the least. I’d note, however, that a 1% FDIC-insured savings account would have pretty much matched the performance of the S&P 500 over the past 13+ years, at zero risk. How much stress did the two stock price crashes since 2000 cause you? The 1% bank account saver slept well.

    What strikes me is that implicit in your points is an assumption that stocks will perform better than alternatives. This of course is the Wall Street marketing mantra. In my view, based on stock price history since about 1995, that assumption is no longer valid. Further, stock prices have become extremely ‘bubbly,’ running up rapidly to peaks only to crash abruptly to devastating troughs. By putting the lion’s share of your savings in stocks, you are hoping that share prices are not in a trough when you need to sell to finance your retirement. You may be proven right, but you could be wrong. Then what?

    Clearly, I do not know the future of stock prices. However, what to me seems very apparent is that stock investing has become far riskier than 30 years ago. We each have to make our own judgement based on our own circumstances, but for me, I’m now unwilling to risk watching as the bulk of my retirement savings goes “poof” as I get older. I’ll take the 1% and look for other, safer options for investing my nest egg.

  4. Matt @ livewellonless

    In my case, it is a sort of desperation. I’ve looked into this to late already. At 40, I need to go the stocks route to have any hope of getting a return big enough to retire comfortably on as my pension pot is meagre to say the least

  5. Brick By Brick Investing

    The only thing that has changed with investing is retail investors have more access to the markets and retirement accounts are now being presented instead of pensions that were offered long ago.

    • Shawn James

      Yes, I am agree with you “The only thing that has changedwith investing is retail investors have more access to the markets and retirement accounts”.

  6. I would imagine that the increased volatility is the result of a confluence of several factors, including the rise of index funds, algorithmic trading, and the expansion of credit to name a few. This is actually a fascinating question that I should look into more.

  7. B By B and Shawn: The transition from traditional defined benefit pension plans to self-managed 401(k)s and similar has surely caused a sea change in how stocks are marketed and to whom. There never would have been an E*Trade baby, for example, if individuals, as opposed to institutions, hadn’t largely been given control over the past few decades of their retirement finances.

    • I tend to agree that this transition to self-managed retirement vehicles has probably changed the industry quite a bit, along with tech advances as well. Retirement may have nearly the same needs as before, but the process has changed quite a bit – thus, the entire landscape seems to have changed as well.
      A bigger thing that I think about, aside from volatility, is actually related to your point on self-managed vehicles being much more prevalent than in days past. I suspect that the notion that someone (or some fixed income) will the there to take care of us is still rooted in the back of the minds of a lot of people, based on how they grew up and what they were told by parents. Or, based on what they observed. The thing is, it seems to be more important than ever to be self-reliant.


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