People buy lottery tickets with astronomical odds against winning. (I must confess, I do that myself when the jackpot is huge.) After all, it’s a cheap price for a few hours of fantasy. But that’s not how you should approach your retirement investments. Investing requires a long-run perspective.
Overall, the stock market has always, in modern history, been a long-term winning hand. According to the Ibbotson market historians, there has never been a 20-year period – going back to 1926 – where you would have lost money in a diversified portfolio of large company American stocks (today’s S&P 500 index), with dividends reinvested – even adjusted for inflation!
That’s why it’s easy to give simple advice for a young investor, making a regular contribution to a 40l(k) plan, or opening a Roth IRA. Some of those contributions will be made at market peaks. But the same fixed dollar amount made on a monthly schedule will also buy more shares when the market is down. In the long run, you’ll come out far ahead.
But what happens for those who don’t have the “long run” in their time horizon? Ah, that’s where you must consider the odds, and put risk in perspective.
The stock market and the economy and interest rates do not necessarily work in lockstep. History has plenty of proof of that. But they are interconnected – and bad news on one front will certainly impact the others. So, let’s take a closer look at where we stand today.
- The Economy. We are currently in the longest economic recovery (from the previous recession trough) of any cycle in modern times. Previously, the longest was in the 1990s, when the economy gained a huge productivity dividend from technology. The end of that economic boom coincided with two dramatic events: the bursting of the “dot-com bubble” in the stock market and then the impact of the terror attacks on 9/11. The S&P 500 declined nearly 50 percent in 2000 – and the ensuing bear market lasted more than 2-1/2 years.
- Interest Rates. In general, rising interest rates are not seen as helpful to the stock market or the economy. Investors tend to feel they can get a better return without taking the risk inherent in stocks. And businesses tend to postpone investment when they must pay a higher cost of capital. But sometimes interest rates rise in good times, simply because the economy is growing and the demand for money is high.
When interest rates are falling, it is typically a sign of slowing economic times. That isn’t good for profits – and it’s not good for the stock market, either.
There is one interest rate situation that really sounds a warning bell for stocks. It occurs when short-term interest rates move higher than long-term rates. (Usually, longer term rates are higher than short term, reflecting the greater risk of lending for a longer period.) But sometimes, the longer -term outlook is so gloomy that interest rates on 10 year borrowings are lower than short-term rates.
That’s called an “interest rate inversion.” And it typically precedes a recession by an average of 11 months – though sometimes it takes longer, and sometimes less time for the economy to turn down, according to Investech Research. And that is where we are now – in an interest rate inversion.
- The Stock Market. The market has its own history. We are now almost in the longest bull market ever. “Almost” but not quite –because the stock market has not (yet) surpassed its peak of early October, 2018. Maybe it will – and maybe it won’t. The big question is: Do you want to take that risk?
This is the moment to step back and examine your own situation – your time horizon, your risk tolerance, and your self-discipline. If you know you’ll sell in a panic situation because you really don’t have the time to make up losses on money you’ll soon need for retirement, then remember that old market saying: “Pigs get fat and hogs get slaughtered.” That’s also a Savage Truth.