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Retirement Planning in Perspective: Understanding Stock Market Cycles and Their Impact

In the last decade, the S&P 500® has returned 14.25%.6Due to these unsustainable high returns, many of today’s retirees and millions of those who are going to be retiring in the next decade have come to see a rising stock market as “normal.” However, it is not necessarily “normal” for the stock market to return over 278.98% in a decade like we have seen. A typical long term bull market or bear market cycle last approximately 30 to 35 years. Based on history, it seems we may be about to enter a long term bear market cycle.

Retirement and the Dow Jones: Decoding Market Trends

The Dow Jones Industrial Average (DJIA) is the oldest traded market index in the United States. Research from several sources7shows that for long periods of time in the United States, the norm was for the stock market to either fall in price or show almost no gain (essentially flat returns). For example, from February of 1906 to June of 1924, an 18-year period, the Dow Jones Industrial Average index showed an annualized loss of .24%. If you had held stocks during this 18-year period, you would have lost more than 4% of your money.

Dow Jones

The Hidden Impact: Inflation and Market Performance on Retirement Savings

Considering that inflation erodes the buying power of the dollar almost every year, flat or negative markets can have a cascading negative affect on your retirement. If you had “bought and held” stocks during the time period of September 1929 to November 1954, which is one-quarter of a century, you would have gained .07% per year, for a total gain of 1.69%.8When you take inflation into account, if you had left your money in the stock market during those 25 years, your money would have lost a great deal of its spending power.

In the 17 years between February 1966 and October 1982, you would have earned .05% per year by leaving your money in the stock market. And if you held stocks from January 2000 to December 2010, an eleven-year period, you would have earned a compound annual rate of return of .06% on your money

Let’s look at recent history from 2000 through 2010. Since inflation averaged approximately 3% per year during that 10-year period,9the money you had in the stock market would have lost more than one third of its buying power. When you factor in mutual fund fees of 1% per year and financial advisor fees of 1% per year, you would have lost more than 50% of your purchasing power during this time.

To put this in lifestyle terms, unless something else changed in the life of a retiree who had invested most of their money in the stock market, that person’s living and lifestyle expenses would have had to be reduced by about 50% over a 10-year span. As you can see, the standard “buy and hold” approach to stock market investing frequently does not work. As a matter of fact, half of the time in the last century the DJIA was either flat or down for extended periods of time. Thus, we can see that it is not “normal” for the stock market to rise during any given time period.

Due to the unpredictable performance of the stock market and the effects of investment management fees, a retiree should not reasonably expect to earn 14% per year in the stock market. You cannot anticipate or make your plans based on “expected future stock market performance,” because no one can predict with certainty what the stock market will do tomorrow, much less next month or next year. What we can learn from this chart is that the stock market experiences large fluctuations in value on a regular basis.

When we experienced downturns in 2000-2002, many experts predicted that we were unlikely to see another stock market downturn of that magnitude for the rest of our lives. Then in 2008, we experienced the second worst stock market crash in our history (after the crash that led to the Great Depression of the 1930s). Banking reforms and stock market “circuit breakers” were put into place in late 2008 and 2009 to prevent crashes like that from occurring again. Yet, on May 6, 2010, the “flash crash” occurred and wiped out nearly $1 trillion market value in less than one day.10

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