Beware the V

By Brad Thomason, CPA
 
I’d like for us to play the imagination game today.  Let’s imagine a special kind of bank, one where you put money in at one hundred cents on the dollar, but when you take money out each dollar may be worth less than 100 pennies.
 
Would you be interested in depositing your money in such a bank?
 
Something very important happened in August of 2000.  Do you remember?  It was the highest monthly close that the S&P would have prior to the bursting of the Tech Bubble. 
 
By the time this happened, the market had been going up for years.  Not in a straight line, mind you.  There had been sort of a dip-and-recovery that played out back in 1998.  But at the trend level, it was a long running bull in anyone’s book.
 
And then it wasn’t. 
 
The S&P 500 closed in August 2000 at around 1,500.  The next time it would close at that level would be in May of 2007.  Over six and a half years from point to point.
 
You don’t have to look very far into the materials we’ve put out over the years to see a central theme: the idea that retired persons should think twice about how much of their money they have invested in stocks and stock funds.  That’s if they have any invested there at all.
 
This kind of event is a main reason why we take that position.
 
That crazy bank I asked you to imagine?  That’s your brokerage account.  If you had gone to that bank at any time between August 2000 and May 2007 to make a withdrawal, you would have essentially gotten dollars back that were worth less than one hundred cents each.  Depending on the timing of the withdrawal, there would have been what was effectively a discount at work, which would have correlated to where in the decline/recovery cycle we were.
 
Had you taken your dollars back at the lowest point of that V-shaped stock chart, in September of 2002, you would have gotten back about 54 cents for every dollar you had put in.  Had you been able to wait another couple of years past that, you would have gotten 73 cents.  Which sounds comparatively a whole lot better.  But to say it’s better belies the fact that it would still be awful.
 
 
Who would want to withdraw discounted dollars?  Because of course since they are discounted, you would have to pull out even more to add up to the sum you needed, right?  Yet, few people could avoid taking a withdrawal from their bank for nearly seven years. 
 
Could you?
 
Now, eventually the market climbed back to previous levels, just like the talking heads said it would.  All was fine.  Really it wasn’t fine for all of those people who’d had to pull out discounted dollars over the years – which by the way, didn’t participate in the recovery, since of course they were out of the bank at that point.  But the fact that some people had permanent losses was glossed over, and the stocks-always-recover crowd said glibly, triumphantly, “We told you so.”
 
That’s how things stayed, too.  For about five months.  Then we entered the dip associated with the Financial Crisis.  Fortunately that one resolved faster.  It only took about five and half years.
 
So for those who were able to keep their money in for that whole nearly-thirteen year period, it worked out in the end.  What proportion of retired people do you figure made up that group?
 
I don’t know the answer to that question.  But I think you get my point. 
 
The only people who avoided a pothole of that size either planned for it ahead of time, or weren’t taking out retirement money in the first place, because they were still working.
 
Food for thought.  Thanks for playing the imagination game, today.