ShareThisWith the stock market up about 60 percent since bottoming out in March, Wall Street may appear to be not as dangerous a place to those who fled for safer havens when the market collapsed last fall.
But making a long-term decision based on short-term phenomenon can be risky business, as documented in a report T. Rowe Price sent to investors this month.
The Baltimore mutual fund provider examined how two investors would have fared based on how much of their retirement savings they allocated to stocks in advance of the 1973-74 bear market. The Standard & Poor's 500 index fell 42 percent over that period vs. the index's 57 percent slide from October 2007 until its March 9 bottom.
While no two markets are alike, the findings should give pause to investors who abandoned stocks and currently are sitting on a pile of cash.
T. Rowe Price's hypothetical investors were: a 65-year-old investor who retired at the beginning of 1973 with $250,000 in retirement savings and was banking on 30 years of withdrawals tied to inflation; and a 45-year-old investor who entered 1973 with $75,000 in retirement savings, made 20 more years of contributions tied to inflation, then retired and took inflation-based withdrawals through the end of 2008.
The mutual fund company looked at how each of these investors would have fared if they chose one of five investment strategies on Jan. 1, 1973, and stuck with it no matter what the stock market did: all cash; all bonds; and three portfolios that start with a certain percentage of stocks that gradually declines as the investor ages.
For the retired investor, the portions allocated to stocks at the start in the three different portfolios were 55 percent, 45 percent and 35 percent; for the investor still working, they were 85 percent, 81 percent and 79 percent.
The study showed that, after yearly withdrawals starting at $10,000 in 1973 and escalating to $41,578 in 2002, the investor who chose the most stock-heavy portfolio would have $400,948 left 30 years later while the all-cash investor would have run out of money after 28 years. Based on identical withdrawals, choosing the all-bond portfolio would have left the retiree with $347,612 entering 2003.
The story is pretty much the same for the 45-year-old retirement saver who worked for 20 more years, retired and took annual withdrawals that started at $58,448 in 1993 and increased in subsequent years based on inflation. The all-cash investor would have run out of money in 2008 at the age of 80, while the all-bonds investor would have entered 2009 with a balance of $1.3 million. Someone who relied the most on stocks would have $2.4 million.
The study assumed investors who chose one of the five strategies prior to the 1973-74 bear market would have stayed the course as interest rates fell to record lows, through the short-lived 1987 market collapse as well as the tech-driven bull market and the subsequent bursting of the bubble. But it's unlikely many of them could have resisted the temptation to do something at one of those points.
So while sticking with stocks through bear markets would have paid off in the long run, it would have worked only for investors who had "the fortitude and discipline to stick with the strategy through some turbulent times," said Stuart Ritter, a T. Rowe Price financial planner.
Len Boselovic can be reached at lboselovic(at)post-gazette.com. For more stories visit scrippsnews.com
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