“Fear has a greater grasp on human action than does the impressive weight of historical evidence.”
– Professor Jeremy Seigel
(Author – Stocks for the Long Run)
Planning and preparing for your financial future can appear complicated. In reality, however, if we keep our focus on 3 numbers, the task is understandable and simple.
The S&P 500 (a fairly broad assemblage of large stocks) has increased over 80 times since the end of World War II. This is important, as this is roughly the time frame that those nearing retirement have been alive. Let’s remember “80” as the first of the 3 numbers.
Next, inflation has been a big factor during the past 65+ years. The cost of living has increased about 13 times during the post WWII period. “13” is our next important number.
Finally, markets rise and they fall (temporarily) before regaining their permanent trajectory. About every 4 or 5 years the market declines by 30% or more. So, “30” is our third important number.
To secure a lengthy retirement of 25-35 years, we need the “80” (stocks). This is our most reliable way to maintain our lifestyle and protect against inflation, the”13″. To achieve both of these, we have to put up with the “30” (temporary declines). Simply put, we are being paid to accept some “risk”, even if the risk is transitory.
Think about it this way. If we need to travel across the country, we have 2 primary ways to accomplish that. First, we can go by air, and this takes 4-5 hours. Alternatively, we can drive, and this might take 4-5 days. Either way we accept some risks, including our intuitive fear that the quicker way (by air) is “riskier”, even if this is objectively untrue. The goal stays the same, only the vehicle used to accomplish the goal differs.
The formula is simple indeed and has worked well for generations. It continues to work today as long as the day-to-day “fog” doesn’t confuse us.
Image courtesy of Ambro / FreeDigitalPhotos.net