“In a recent nationwide survey of working age Americans, 79% agree that the nation faces a retirement savings crisis…more than half of Americans (55%) are concerned that they cannot achieve financial security in retirement.” —Dan Doonan, Forbes
Do not buy stocks because market timing feels right or your buddy picks “hot stocks”; even PhDs fail to understand human choice and market volatility. Insider trading may take you to Martha Stewart’s jail cell and professional managers of pension funds and university endowments probably beat you to the hot stocks missed completely by stock jockey salespeople.
Investors must take the risks of running out of money late in life or seeing savings eroded by inflation against the toss and turn of the market roller coaster, which caused stocks to drop 30% in just three weeks of 2008. Imagine returning from exotic Bali to find your 200K retirement dwindle to 140K; what might you do? If you sold in panic and scapegoated stocks, you would have missed out on 403% gains (10.5%/yr.) to 2024 and you would not have 560K saved.
Past performance never guarantees future results, and standard deviations are higher, but stocks historically have outperformed gold, housing, bonds and CDs. Average investors can lessen risks to treasure potential stock gains for flourishing life plans.
Corporations grow capital by selling ownership rights called stocks. Roughly 40% of the gains made in the last hundred years come from dividends; thus, 60% of gains came from those who bought stocks for less than they sold stocks. Stocks are risky because companies in bankruptcy place stockholders last behind creditors demanding pay, tax collectors, suppliers and even bondholders.
Peter Lynch and Warran Buffet generally sought stock bargains, and fund investors rode their success. Their “value investing” strategies analyzed SEC reports of companies and competitors; they even interviewed top managers well enough to see if companies are bargains (value stocks) or growing market leaders (growth stocks). Few private investors do this painstaking research.
Diversification protects investors against the risks of any one company (low sales or high costs), and investors can buy bundles of stocks as Exchange Traded Funds (ETFs) or mutual funds with varied fees focused on growth or income, real estate or utilities, American or foreign, etc., and can even order liberal or conservative socially responsible funds. ETFs are traded like stocks at any time of day with cheap index funds like SPDR’s (S&P 500).
Mutual funds can be no-loads that perform like ETFs but with daily accounting (and perhaps more capital gains tax) or they can boast of the stock picking abilities of managers to outperform indices after fees. Ifa.com reports that after five years “95.5% of active stock fund managers lagged their indexes.” Clint Eastwood famously asked, “Do I feel lucky?”
Stock ownership takes less time, dirty cleaning, ugly repairs and managerial skill than leveraged real estate, and it won’t threaten you with lawsuits or personal bankruptcy. Investopedia reports that “From March 1980 through September 2023, the U.S. housing market’s annualized average growth rate was around 8.6%.” You can’t eat housing or use it for travel, but you can make a house feel like home as you leverage gains at low interest rates. The case for stocks really rests on a statistically justifiable belief that easy, liquid stock investments stocks will follow their 100-year historical path of 10.62% (tradethatswing.com). Over the last 50 years, Forbes reports that “stocks averaged 11.1% annual returns while Baa Corporate Bonds delivered 8.49% on average, and cash yielded 4.3%.”
I love stocks, which create jobs and products that benefit everyone; even Marx recognized the transformative power of capital. Stock investing offers some federal tax benefits—denied by California—through lower capital gains and qualified dividends rates. Stock sales and distributions from retirement accounts are taxed as ordinary income.
Investors should consider stocks, bonds, gold and real estate to increase wealth while diversifying portfolios to reduce risk. When median Gen X households only have $40,000 of retirement savings (Forbes), they must consider risk-taking to produce dramatically better long-term prospects. Stocks may bring salvation to Santa Cruz Mountain neighbors who save too little or invest too fearfully.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
