Outwaiting a few years of bad market pays off

Question: In your column last week, you said you only lost 12% for your clients over 4 years? Great! Plus what you "earned" in commission. Stupid me. I put my $100,000 in 5 year, 5% CDs. I didn't pay a "professional" for the advice. My portfolio is worth $121,550 today. ONLY $33,000 DOLLARS MORE THAN YOURS. Wow, how do I sign up for your advice?

Answer: Touch a nerve, did we?

I assume you were referring to my hypothetical "unlucky investor" example from last week. This is the guy that put his $100,000 in the stock market on January 1, 2000 and had lived through the last four years of recession, bear markets, terrorism and corporate CEO scandals.

I was making the point that crooked corporate CEOs had actually terrorized his portfolio more than terrorists.

I was not claiming that I, or any other financial advisor I know, had invested my clients' money in that manner; I was simply using a common proxy for the general stock market, which is the S&P 500.

But allow me to take the bait and deal with your criticism - that a 12% loss of value over four year seems a great waste when compared to 5% growth over that same four-year period.

And if life were lived in the rear view mirror (if I could make my choices after the facts have occurred), I would agree that you have a good point. But life obviously isn't lived like that and so I must disagree with the validity of your criticism. We can only make the best choices we can for the future based on what we know of the past and of our present circumstances.

You say that a 5% CD would have grown (over these last four years) from $100,000 to $121,500. No doubt, that beats the heck out of losing $12,000 during that same period.

But clients do not hire advisors to manage money for a four-year period of time. I tell every client (as I also wrote in last week's column) that investing takes at least five years, and ten or fifteen is even better. You may not like that fact, but are you planning for your need for money to expire in four years?

And what next? Do you stay in CDs? If you do, just know that inflation will consume some portion of the interest they earn each year (will it be 2%? 3%? - no one knows). And taxes will consume a portion. If you pay 20% income taxes, your 5% interest will be cut to 4%. Minus the 2% to 3% eroded by inflation and that leaves you with…

What if we shift the focus from the last four years to the last ten? $100,000 invested in the S&P 500 in the summer of 1995 would have risen to about $300,000 just before the crash. And today it would be worth about $250,000. But even with the fall from $300,000 to $250,000, that investor still realized about 10% total return per year on her money.

If that same person had put it into your 5% CD, she would have had a nice, safe steady ride to $162,000 today.

The fear of the ups and downs of the stock market has always caused the kind of reaction reflected in your question. Fear of the unknown is a powerful force. And for that reason, banks will always have plenty of people who will deposit their money and be perfectly happy. And if that is you, OK. But I will not play along with the fiction that everything is going to be OK for you because you are leaving all your money in the bank.

The truth is that even with the horrendous volatility of the last four years, there is no safer place for long-term money than the ownership of great American companies (through ownership of their stock). That's because the cancer of inflation is constantly eroding the purchasing power of your dollar. And the only medicine that can get you well is called "growth." Sometimes there are periods when participating in "growth" means actually sliding backward (i.e., the last four years).

To borrow from Winston Churchill's quip about democracy, "The stock market is the worst possible vehicle to create wealth ever devised by man...except for all the other vehicles."

It often is not fun, but eventually is always works - but you must give it time. Maybe that's what they meant when they said good things come to those who wait.