Okay, I’ve noticed a belief going around for the past few years that I feel that I have to write about to dispel the notion that the stock market is broke and not worth participating in!
Both an individual I know, and the media in general has called the past 10 or so years a “lost decade” from an investment standpoint. This is not true, and I’ve been able to achieve over an 8% annual return during the time that the media gurus kept stating that the market has disappointed for the past 10+ years.
Before I start my explanation as to why they are wrong, let me present the S&P 500 chart for the past 10+ years…
Not pretty huh!
Why You Should Still Invest In The Stock Market
You can see why the media is calling it the “lost decade”… If one were invest all their money all at once (this is called a lump sum) in either year 2000 or at the end of 2007, and not invest any other money, then it’s true, it would have been a lost decade.
But more than likely, you had a 401k plan that would dollar cost average out your contributions during the year. And these stock market dips created an opportunity instead of a flat “lost decade” period of time.
To be honest, my conviction in this “opportunity” was so strong that I increased my contribution amount during the dips that started back in 2008. The amount I increased my contributions was only a few extra percentage points though, so I don’t attribute my over 8% gain to it.
My buddy at work even did better. He’s a young guy and started investing in 2007, and when the 2008 stock market dropped like the bottom fell out, he was discouraged and said he was thinking about stopping his contributions and even pulling his existing money in his 401k (this would have been a huge mistake if he did). I explained to him, the advantages of staying in and told him that I was increasing my contribution amount. Then I explained to him how I was jealous because he was just starting and was going to be able to buy shares of stocks at a huge discount. I even called it a once in a lifetime opportunity. He said I wear rose-colored glasses, and perhaps he’s right, but he didn’t stop contributing and didn’t pull out his money (whew!).
The article on “dollar cost averaging” that I linked to above explains how dollar cost average works, but in case you don’t want to click on it, I’m going to do a quick explanation here.
With an investment instrument like a 401k plan, you buy a set dollar amount of shares of stocks (or really mutual funds) on a repeating periodic basis. In my case that repeating period is every 2 weeks. So when the price of shares of an investment drop in value, I’m able to buy more shares of that investment. This is the magic that enabled me to have an over 8% annual return during the past 10+ years.
To the person not in the know, the past 10+ years in the stock market seem like a tragedy and huge disappointment (aka lost years), but really those dips were great opportunities to buy cheap shares of stocks and mutual funds.
So you will hear people use the chart above to make it sound like the past 10+ years was a huge loss, but really it was a pretty good term, at least in my 401k plan and other stock market investments.
Hope this clears up some confusion as to why it’s still wise to invest in the stock market via a 401k plan.