I’m writing this blog with the intention of giving readers a chance to see the long-term impact of investing in stocks during both the accumulation phase and the distribution phase. I’ve chosen 20 years as my time period for a couple of reasons: (1) Plenty of mutual funds and ETF’s have been around that long so that we can look at a variety of funds over a number of different periods. (2) I want a 45 year old or even 50 year old to see the power of just 20 years of saving. Further, distributing assets over 20 years will generally show whether the approach is sustainable.
I’d like to choose some of the more popular funds, both actively managed and index funds as well as any ETFs that give us a long enough history. The purpose is to show the power of stocks for building wealth over time. Many investors get overly fixated on the short-term gyrations of the market and think getting in and out at the right time is the key to building wealth. Nothing could be further from the truth. Active fund managers that get in and out of the market have subpar records compared to funds that stay invested. This blog intends to show readers what happens to investors who stay the course.
So many investors are led astray by hucksters claiming to know when the next 80% drop in the market will occur (btw - an 80% drop in the market overall has only happened once, during the Great Depression). Experts tell us the market is “extremely overvalued” frequently. There are pundits and managers who have been saying such things for the last 25 years!
Investing in stocks is not some intangible lottery ticket. It means purchasing a small piece of ownership in a business in the United States or abroad. Your ownership share may be extremely small as a part of the whole, but you receive the same benefits on a proportional basis as a person who owns a large stake in the corporation.
During the contribution phase I’ll assume a savings rate of $500 per month. If you are under the age of 50, this is the maximum IRA (Roth or traditional) contribution if multiplied by 12 months. I’m allowing the scenario to increase the amount of the contribution to account for inflation. If the US government doesn’t increase the allowable IRA contribution, you could always do your saving in a 401k or taxable investment account.
During the distribution phase I’ll assume a withdrawal of 5% of the account balance as the starting amount and adjust for inflation. I’ll have withdrawals come out monthly since that is the way most of us manage our bills. If the money runs out using that method, we’ll lower the distribution until the money lasts and note the portfolios and distribution percentages that work.
I’ve already worked with the numbers enough to propose what you’ll see as these scenarios unfold:
20 years of saving in equity funds adds up to a lot of money, even if you start at a market high or don’t have a highly diversified portfolio.
Most of the time investors can withdraw 5% of their assets from their portfolios annually, but this becomes dicey if their portfolio is concentrated in one particular type of stocks. So I would posit that diversification is more important during the distribution phase than it is during wealth building.
The winner (the best outcome) will be dependent on the period, not the manager or index type. There are periods when US Large Growth shines and times when investors are much better off in foreign or small company equities.
I will integrate bonds at times, but this blog will be concentrating on equity rather than fixed income. Bonds can be of great benefit to investors, but the long-term benefits of equity investing are unmatched.
I may use asset class returns at various points in order to use some older period returns. There is always the fear that we might revert to some darker period in history, so I’ll try to look back as far as possible in order to assuage that fear.
Thanks for taking the time to read. I’m hoping you find encouragement from this to stick with equities and not be rattled by the financial media that predicts calamity around every corner.