If you’re thinking of taking your 401(k) out of the stock market, or too terrified to invest more, you need to meet my friend Betty Badluck.
Poor Betty has had the worst luck of any stock investor you’ve ever met. In the last 40 years, she has invested in the stock market only six times. And each time her timing was an absolute disaster.
The first time Betty invested in stocks was in late September 1987. She had been criticizing herself for missing out on the great boom of the 1980s, and when stock prices began to decline late that summer, he thought it was a good time to buy the fall. . She invested $400, which is (adjusted for the consumer price index) exactly $1,000 in today’s terms.
A few weeks later, on October 19, the stock market staged its biggest one-day crash in history, eclipsing even the worst day of 1929. Betty saw a quarter of her money disappear in the blink of an eye.
Well, after that experience I didn’t want to go near the stock market for years. It wasn’t until 1990, when the market fully recovered, that he steeled himself to invest more in stocks. On July 31, 1990, he invested another $450 in the stock market, which is (again) $1,000 in today’s money.
A couple of days later, Saddam Hussein invaded Kuwait. Oil skyrocketed, the stock market crashed, and the world went into crisis.
Once again, Betty kicked herself as she watched some of her hard-earned money vanish before her eyes.
He thought, fool me once, what a shame, fool me twice, what a shame. So after these two disastrous experiences, she gave up on the stock market altogether. And it was years before he even considered it. But throughout the 1990s he saw the Dow Jones DJIA,
and the Nasdaq COMP,
It went up, and it went up, and it went up, and it went up. They even ran commercials on television bragging about how high the Nasdaq was going. And eventually this wore Betty out. Finally, after many years of refusing to throw another dime into her 401(k), she relented. And on July 31, 1998, she invested another $560 (which is $1,000 in today’s money).
A couple of weeks later, Russia defaulted on its debts, sparking a global financial crisis. A giant hedge fund called Long-Term Capital Management imploded, even though (Peanut Gallery: “Ha ha ha!”) had multiple Nobel Prize winners on its frontier. Everything collapsed.
You get the picture. Poor Betty Badluck. She didn’t give up. But every time she dared to invest in stocks, it turned out to be a terrible, terrible moment. So she bought in late March 2000, which turned out to be the peak of the long bubble and the start of the longest bear market since the 1970s. She bought again in late August 2001, just before 11 of September. And she bought more shares in late August 2008, just before Lehman Brothers collapsed.
His timing literally couldn’t have been worse.
But Betty did two other things.
The first is that she did not try to choose stocks, funds, or even markets. She invested in a global stock market portfolio that matched the MSCI World Index, including US and foreign equities.
And after investing his money and watching it sink… he left it there.
What happened to Betty?
Well, from there hangs a story.
She did well.
Although he chose the six worst times since the 1980s to invest, he made an average return over the next five years of 20% and an average return over 10 years of 100%. She doubled her money. Despite her disastrous and terrible time, she was in the black after five years four times out of six, and in the black after 10 years 10 times out of 10.
Today, even though her total cash costs for those six investments totaled only $3,500, her portfolio is worth $17,500. That’s more than five times your investment. And that even takes into account this year’s losses, in which the global stock market, and Betty’s portfolio, are down 22%.
When adjusted for inflation, Betty’s portfolio is worth three times what she invested.
And remember, this is not an average return achieved by the average investor. This is the long-term return earned by the most unlucky investor in modern history. If you’re too scared to invest in stocks right now because you understandably fear the market will continue to slide, ask yourself: Do you think you’d be as unlucky as Betty Badluck?
In reality, the world market is already down by more than a fifth, so there’s no way you could time things as badly as Betty. You can’t be buying at the top because we’re already a good distance away.
I have absolutely no idea about the next month, three months or three years. I don’t know which markets will do better and worse, and by how much and when.
(By the way, no one else. If you don’t believe me, come back in a couple of months or years and let’s review all the forecasts.)
However, I can only remember a couple of times in my career when people on Wall Street panicked as much as they do now: October 2008 and March 2020. Both turned out to be good times to buy.
Most importantly, people saving for retirement aren’t looking to make money on stocks in the coming weeks or months (lovely though that is). They’re looking to save money so that in a few decades, when they’re sick of work and want to smash their laptop with a sledgehammer and retire, they can open up their 401(k) statement and see with delight and surprise that they’ve amassed a huge amount of money.
In which case, they really have no excuse not to buy right now. And if you don’t know, only Vanguard Total World Stock VT,
or a mix of say 40% iShares MSCI USA Equal Weight EUSA,
and 60% Vanguard FTSE All World ex-US VEU,
it will be better than nothing.
I bet they won’t be as unlucky as Betty Badluck.