As of this post the Dow Jones Industrial Average is at 13,086. That’s up from the March 2009 low of 6,547. As I watched our nation’s economy crumble, I read in the news and heard from my older friends that our nation’s retirement funds were being destroyed as a result of the market crash. Now that the DJIA is back to a healthy level, have retirement funds returned as well?
For people who held, yes.
For people who panic sold, no.
Huge heapings of “it depends” here.
Some retirement funds were heavily invested in their own company’s stocks. This could do well or horribly depending on the company.
Funds are often invested in a basket of securities that are pegged to various retirement dates. A 2105 fund would be more conservative than a 2035 fund because stocks fluctuate short-term but normally do well long term.
Many funds allow you to invest in bonds, REITS, or other types of securities than mere stocks. Those would also have been affected by the 2008 meltdown, and have recovered to different extents.
Generally speaking, it’s true that a group of stocks reflecting the broader market would have doubled from the March 2009 low. But who knows what percent are in that particular situation?
sachertorte pretty much nailed it in one.
For people who were actually retired at the time the market crashed and didn’t have massive retirement funds, it was perhaps a bit of a problem: if they continued to spend at pre-crash rates, that meant they were selling off their shares at an accelerated rate (unless they selectively sold off bonds and held onto their stocks). For people with massive retirement funds, it was less of a concern, because they knew their wealth would still be enough to last until the market recovered, and then would be enough to see them through to the end of their lives.
For everyone else who wasn’t going to need their nest egg money any time soon, all they had to do was…nothing. Keep their money invested (and keep investing more), and wait for the market to recover, as it very nearly has, just a few short years later.
For people who said, “Holy fuck! Wall Street is on sale!” and bought extra when valuations were depressed, yes, a lot.
I was (and still am) a member of a US-based IRA where you had various percentages of your money invested in various kinds of investments. As the stock market went down, maintaining the percentage invested in stocks as compared with bonds meant that your fund would buy more stocks to maintain the percentage – so (as I understand it) you would be buying into a falling market, which would turn out to be a good decision once the market recovered.
Diversification is your friend. But that means across asset classes not just buying different stocks or bonds. So add emerging markets, real estate, commodities, and a variety of others in an percentage that matches the risk of that class to your tolerance and your needs.
The younger you are, the more you need to be biased toward growth and therefore risk (but intelligently of course). As you approach retirement, you rebalance your risk profile and therefore the bias of your portfolio. I’m pretty sure this is std financial planning advice but since I’m not a CFP, rely on my advice at your own risk.
Personally, I rode the market all the way to the bottom like Slim Pickins in Dr. Strangelove. Yee-haaaaa! Except then I got to ride it all the way up. And since a good chunk was in bonds, well, with interest rates going into the basement and then starting to dig . . .
I manage my investments the way Giles describes. I’ve not only recovered, I’m up about 15% above the peak of my portfolio from 2008 or so (with no new contributions to that account). The gain from the very lowest point in 2009 or so is about 50%. I aim for about 40% invested in bonds, with most of the assets in all categories held in ETFs.
For people who made calm and rational decisions through the disaster, who were reasonably diversified, and who didn’t need to live on the funds, their portfolios should be pretty well recovered.
That’s known as dollar cost averaging and can be an excellent strategy for some circumstances.
Yes and no.
To sum it up, we’re back where we were 4 years ago. We’ve lost 4 years of growth too. If you expected, say a nice sedate 5% growth per year, you’ve lost over 20% plus compounding since Bush’s mess came home to roost. If you were hoping to retire, your plans are set back 4 years or your expectations diminshed by that…
Assuming you just held, didn’t sell.
If you had the money and timing to buy in at the bottom, you’re sitting pretty.
No, Giles isn’t describing dollar cost averaging (if I’m reading him right). This technique works even with lump sum investments because it’s all about changing the allocations of stocks. Here’s a detailed example:
Let’s say we start with portfolio A: 50 in bonds and 50 in stocks. After a year in a phenomenal stock market, we now have 55 bonds and 95 stock. We sell 20 units of stock and buy 20 of bonds, so that we now have 75 bonds and 75 stock. But now the market crashes and we end up with 80 bonds and 60 stock. So we rebalance again, selling 10 bonds and buying 10 stock, bringing us to 75 bonds and 75 stock. Now the stock market does well, and we’re at 80 bonds and 120 stock, so we rebalance and end with 100 bonds and 100 stock.
If you compare that to portfolio B which does not rebalance, you starts at 50/50, goes to 55/95, then to 58.4/76, then to 62/121.6.
The first example ends with 200 in total value while the second ends with only 184. (This is a trivially simple example. I’ll leave it to others to crunch real numbers, analyze risk, etc. The take-away here is the rebalancing does affect the net return.)
The point is that bonds do not lose value during a crash - not to the extent that stock does anyway. In fact, bonds often go up in value during a crash because investors are seeking a safe harbor; at the very least, they continue earning a little interest. Either way, by maintaining the same percentage mix of stock and bonds, you are always buying stock low and selling high; the bonds preserve capital from the highs and make it available for buying during lows. Additionally, you are preserving your original risk profile - if you don’t rebalance, your portfolio actually gets more risky as you age because risky assets tend to grow more quickly.
The other thing I like about rebalancing is that it can be as simple or complex as you like. This example used only stock/bond, but we could create a scenario where we balance between six categories: small-cap/large-cap/international/short-term/long-term/cash. (These six categories are in fact what I use.)
I like to look at it as in late 2008 we were transported back to 1996. However it only took us 4 years to travel forward in time 12 years to 2008. But we lost 4 years of growth during that bit of time travel.
Yes, you have to look at the big picture. It’s easy to feel discouraged if you look at the period from 2008 to now and see that we’re just getting back to where we were then. But where we were then was at the end of a decade-long period of unusually steep growth. Basically, stocks were overvalued at that point; we were sitting on top of a bubble. If you look at the 100-year growth curve, we had risen significantly above the curve, dropped down below it temporarily, and have come back to, if anything, being somewhat above it again.
This isn’t quite right either. the Dow is back where it was, but the DJIA doesn’t include dividends. The dividend yield on the Dow is estimated at 3% right now, and I believe it was higher during the past few years. So if you expected 5% return you only lost 2% if it. On the other hand, you should have expected a bit more than 5% on the Dow.
I want to thank you all for the answers. I think my OP has been thoroughly addressed, although I’ll definitely continue reading the ongoing discussion!
One more quick question, if anyone can answer: Is there a measure (like the DJIA, Consumer Confidence Index, etc.) that is designed specifically to measure American’s savings? Does AARP or any other consumer group keep track of it?
I can’t really talk about “retirement” funds, since I’m still pretty young and for me it’s a long-term investment.
But I’ve been putting money steadily into a 401(k) fund for about seven years starting 2005 when I got my first real job. All index funds.
When the market really tanked in 2007-2008, I saw my “value” go down by about half. I didn’t really change my contribution, other than turning it up (pre-tax contribution) when my company cancelled its company match. I’m up to 16% pre-tax now, though I may turn it down next year when my company has budgeted to return the company match.
During the boom years (2005 - 2007 or so) I saw great returns. Q3 and Q4 of 2008 of course saw the “value” of my 401(k) crash, going to about 50% of what I had starting 2008. I didn’t move any funds, just increased the amount for every paycheck (twice a month) when the company quit doing the match.
I finally got back to my pre-crash “value” sometime last year. This year, the “returns” are actually really good. Something like 15%-16%. This is all the market recovering, and I’m fine with that. After all, I was putting money in when the market was at its lowest.
So I’m back up, and I met and exceeded my informal goal of having one year’s salary in my 401(k) by age 30. I expect the market to continue slowly recovering, so I’m feeling OK.
I do feel for the people near retirement near the crash. That’s a hard thing to come back from. I’m lucky, since my retirement is three decades away at least. Hope the market helps them out, hope they had moved their money into less volatile funds, hope they come out ok. But I know it’s a lot harder for them.
In the US, it’s the Department of Commerce that tracks it. The Personal Savings Rate is what you want to look for. Here’s a link showing a summary of the rate over time: Personal Saving Rate (PSAVERT) | FRED | St. Louis Fed
I’m not sure exactly how the rate is calculated, but this should give you some terms and sources for additional research if you want to.
Thank you for the link, Dracoi! Unfortunately, that’s a measure of how much money Americans save as a percentage of income. It’s still very interesting, but not what I was looking for.
Can you clarify what you’re looking for, then?
Oh sure! I wonder if there is a dollar number that could be used to compare the amount of savings Americans have today (ie $4,000,000,000) to the amount we had saved in 2007/2008 before the crash, adjusted for inflation.