Deal of the Day: 0% for 15 Years!
By Brad Thomason CPA
How do you earn zero percent for fifteen years? Well, first you call your broker sometime in March of 2000, and tell him you want to buy a Nasdaq index fund, or maybe the derivative version, the QQQQ. Then you go to sleep until March of 2015. And then you sell it.
A hundred dollars in 2000 would have grown to a whopping hundred dollars in the here and now!
As you probably noticed, about a week ago the Nasdaq crossed the 5,000 mark for the first time since the spring of 2000. Bill Clinton was president, no one had ever heard of Al Queda, and unbeknownst to all of us, we were about to encounter the bursting of something called a “tech bubble.”
Stock prices started falling soon thereafter. The better part of an entire generation has passed in the meantime, and technology really did change the world. But it took all of the progress of recent years – the resurgence of Apple, the creation of Google, and Facebook and Twitter and all sorts of app and networking and broadband companies – to get stock valuations back to where they were in March 2000. That’s a lot of companies that didn’t even exist back then, and many of the ones that did failed years ago.
Whether or not that mattered much would have been a function of what type of investor you were. If you were the Harvard Endowment or Calpers, you probably didn’t care. Ok, well you probably cared. But it wouldn’t have been a big blow. You spent 15 years with a chunk of your capital not producing anything. But you didn’t lose anything, other than an opportunity to earn a return on the money.
But if you had been retiring in 2001, the story could have been quite different. At some point during the next 15 years, you probably had to sell some of your shares to have money to live on. You would have sold at discounted prices. Your capital would turn into budget money; it wouldn’t have been around to invest anymore. So you took a loss when you sold, and there wouldn’t ever be any chance to earn the loss back, because the money would have been spent.
The fact that the market returned to previous levels wouldn’t have done you any good.
What kind of investor you are has a huge impact on what constitutes a good investment. And this factor almost never gets more than passing mention in the main-stream financial press. Institutions can often afford to hold investments for decades without any need for income or liquidation. That’s because these types of investors have an investment horizon which is more or less perpetual.
Families don’t. Families save money for a while, and then they use the produce – and maybe the capital too – to generate an income to pay monthly expenses after the paychecks stop. These difference in liquidity need and duration should factor heavily in the kinds of things that families invest in as they approach and reach the retirement years. Too often, they doesn’t.
Before you invest in something, especially a stock market that’s just undergone a long period of appreciation, ask yourself this question: if you had to wait 10 or 15 years to take any money out, could you?
If not, stocks may not be the best investment for you anymore. And even if you can, why would you take on that kind of risk for no return, especially when there are a lot of things out there which can produce better results?
A return to 5,000 has some symbolic importance, I guess. But how much and for whom remain open questions. Even for those who held on all that time, when you account for inflation they still aren’t really back to even. And they lost 15 years of earnings potential which they will never get back. For the individual investors though who couldn’t hold out all that time, they saw their account lose about half of its value in a matter of months; and most had to sell at least some of their shares in the down years.
It’s fun to celebrate big numbers on the indexes. Just don’t lose sight of the fact that stock levels don’t work like tides: all the boats don’t go up and down at the same rate. For a lot of investors, this latest story is less a tale of triumph, and more a reminder of how the market’s normal operating procedure can be very damaging from time to time.