Episode 1: The Stock Market Doesn’t Matter

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Hello and welcome to Revamping Retirement, a podcast brought to you by Cammack retirement group, where we tackle the retirement plan related issues, plaguing fiduciaries and plan sponsors. Our host Mike Webb has more than 25 years of experience in the retirement plan industry and is a nationally recognized subject matter expert. We hope you enjoy Revamping Retirement.

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Hello everybody out there in our virtual audience. Today’s topic is the stock market. It has its ups, it has its downs, it’s had a lot more ups and downs lately. Terrible month in December, record month in January. Where’s it going to end? Well, as a retirement plan investor, you should not care. When I start talking about stock market TV and the retirement plan investor, I generally turn it off. It has no bearing.

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for the vast majority of retirement plan participants. And I’m gonna explain why in a second. But first of all, we’re gonna start every podcast off with a trivia question. And today’s trivia question on our Revamping Retirement Podcast is the following. 2008, the Great Recession. Stock market went down 33%. That means for those of you not swift on the percentage math, people who were invested in the stock market as measured by the Dow Jones Industrial Average,

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lost a third of what they had, a third of their value. That is a lot. Our question today is, when was the last time the stock market, as measured by the Dow Jones Industrial Average, lost more than 30 % of its value in two consecutive calendar years? That’s stock market losing, as measured by the Dow Jones Industrial Average, more than 30 % of its value in two consecutive calendar years. We’ll have…

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That answer at the end of our very brief podcast. We will keep our podcast at about 10 minutes in length because I’ve noticed that when I listen to our podcast, I generally fall asleep after about 10 minutes. for those of us like me with short attention spans, and even for those of us with slightly longer attention spans who might appreciate brevity, we’re going to keep things short and sweet. So today’s topic again, the stock market.

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and why you shouldn’t care about it as a retirement plan investor. Let’s give you a little example of why you shouldn’t care. And I am gonna use the math, but I’m gonna have my producers help me out because I am not a math person and I’m gonna use very simple math. So don’t worry, don’t fall asleep on me yet. We’re gonna get through it very, very painlessly, I promise you. But it’s a great way to illustrate the point. Let’s just say I just started out, even in my retirement plan. Obviously I have zero.

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And let’s say I put in my $1,000 in my first year. And let’s just say the market had a very bad year, like 2008, and we lost 30 % of our value in our investment. So I put in a thousand, I lost 30 % of that. And my producer is going to help me out here. 30 % of a thousand is what? Ah, $300. Very good. So we put in a thousand and we lost 300. And you may say, well, that’s pretty terrible.

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But in retirement plans, we’re thinking about the long game, first of all. And second of all, it’s not what I put in, it’s what my account balance built up to over the course of the year. That’s my asset growth, if you will, each year. So in this particular case, even though I put in a thousand, we disregard that, we started at zero. And our account balance grew to 700 bucks. Obviously, that’s great. That’s like what we call an infinity return when you start zero and you get…

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you get 700 times, you get to $700, that’s infinity returns. And that’s a very good growth rate in the first year. But let’s take it out to year two. The $700 I put in, let’s say I put in another $1,000, and I’m not making very much money, and that’s what I can afford to put in. So I’ll put in another $1,000 for the year. And I’m making the math really simple, by the way, here. I’m assuming the market loses all its value the last day of the year, obviously, I know.

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Don’t send me tweets or emails that the market does go up and down value over the course of the year. We’re making an example very simple that we only value the investment that we’re in on the last day of the year. Let’s just say that the investment again went down 30%. So let’s say this is year two, and then we get to the trivia question the last time that happened, but we had two calendar years now that we lost 30 % our investment.

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I can do the math on the first one. 700 plus 1000 is 1700. We lost 30 % of that. And again, I’m gonna have to look to my producer who’s showing me a big card that says $510. So I’m gonna trust that she is correct. So we lost $510 in our second year. 1700 minus 510 is what? I see it another flash card. That it is 1190. So we’ll go with that.

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So 1190, and then I started out year two at 700. So I can do that math. 1190 minus 700 is 490. So I actually grew my investment still in a year, in two consecutive years where the market went down 30%, my investment went down 30%. I still grew my investment more than half because 490, I can even figure out, is more than a half of 700. So we’ve got.

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An example that demonstrates to us that in my first few years, and if you keep this example going, this is going to happen for a while, probably until at least year 10 of someone’s employment, that the stock market really is not the driver of my asset growth. What is the driver is how much I put in. Savings is a tremendous component of my growth from early to mid-career.

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It really doesn’t matter what you invest in. I mean, obviously you just want to, you know, choose a well-diversified portfolio or choose a target date fund if you don’t want to even bother choosing your investments, but it really doesn’t matter all that much what you invest in. Your savings rate is the most important early on and even mid-career. So when do investments matter a little? Well, let’s say I have a million dollars in my plan.

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Well, if I have a million dollars in my plan and I lose 30% of that, that’s not chump change. That’s $300,000. And you may say, whoa, well, I really should really be careful. And I should really follow the stock market every day. And I really should worry. Why are you telling Mike that I shouldn’t worry about the stock market? Because if I have a million dollars, first of all, there, chances are I can take the hit. You know, I’m doing okay. So, but secondly,

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That $300,000 is not a real loss until you withdraw your money. It’s called what’s called a paper loss. It’s not actually a real loss. And we have to explain that to show you how paper losses work. If I have a $300,000 loss in my account, even in the Great Recession, we’ll go back to 2008 when people lost a third of their value, so that would have been even more than $300,000. Within four years,

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little actually a little over four years but just over four years the stock market gained back that 33 that 33 percent and then some so if you were if you did not take any money out of your account when you had a million dollars and you lost that three hundred thousand dollars chances are you recouped it i’m not going to get into math reasons why but it would take longer than four years but just trust me um you chances everybody just about everybody who suffered that loss during your recession if they

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If they didn’t change their investments, they didn’t panic when the stock went down and go, oh my goodness, I have to go to the money market or fix it. If they just stayed the course with their diversified portfolio, chances are they got their money back and then some within five to seven years. And if you ask anybody who changed their investments, who panicked and changed their investments to stable value or money market back in 2008, when things went south, you’re going to be talking to some very unhappy people because the market obviously has gained quite a bit.

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since that time in the 10 year remaining years. So what does that tell us? The $300,000 I talked about before is not a real loss. The only time it becomes a real loss is, let’s say I had a million dollars, and let’s just say I’m retired and I wanted to pull an MC hammer and in year one of my retirement I’m gonna be putting people on the payroll, spending it all, partying, woo, having lots of fun. Then it matters to me because I’m not.

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I lost my $300, I’m going to spend the other $700,000. So I’ll have nothing. How many retirement plans participants do that? Not many if they want to have a fun retirement. They develop what’s called an income stream. They take a little bit out of the time. A Joe rules is 4%. So that million dollars, they take $40,000 a year out. If they’re taking $40,000 a year out, the remaining money in there is still in there working for them.

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If they stayed, course, with their investments, they’re going to recoup all that money, including the $40,000 they took out. So it’s not a major deal, even for someone who has a million dollars. There are specific scenarios that, you know, where it is quite impactful, especially people, you know, who might be depleting more of their retirement account than they’re earning. And obviously in a bad year like that, they would, but even people in the longer term.

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And there are some specialized areas where those investments would matter and they might have to make some allocation changes. That is 0.5 % probably of all retirement plan participants or less than that. So for the rest of you, for the rest of the 99 percenters, don’t worry about the stock market is the message I want to get across. And even plan sponsors tend to spend way too much time on investments than they do on things like savings rates, which are far more important. The most impactful thing you can do

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in your retirement plan is start saving early, start saving in your 20s. Investments really have very little to do with the big picture. So I see that we’re at the 10 minute mark. So when it gets to the trivia question today, the trivia question one was, when was the last time the stock market as measured by the Dow Jones Industrial Average declined more than 30 % in two consecutive calendar years? Well, you have to go all the way back to 1930 and 1931. And if you knew that answer, give yourself a nice golf clap.

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Because even those in the know probably would have said 1929 and 1930 because the 1929 was the big stock market crash. But in 1929, the problem with that year was there was a big run-up in the investments before the stock market crash. So investments in that year, I believe only declined for the whole calendar year, about 17%. So if you guess 1930 and 1931, you are the big winner. Don’t have a prize for you. But you could be satisfied that you know a little bit about why.

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Short term stock market movements should not mean anything to you at all as a retirement plan investor. For Carol McCauley, our producer, Comac Retirement Group, and the entire crew and production staff, this has been Mike Webb, and this has been Revamping Retirement.

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The content in this podcast is for institutional investors and plan sponsors. The information is intended to be educational and is not tailored to the investment needs of any specific investor. All examples of investor gains and losses are hypothetical and intended to illustrate the importance of early saving and consistent retirement contributions over time. Investment decisions should be based on an individual’s own goals, time horizon, and risk tolerance.

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Nothing in this content should be considered as legal or tax advice and listeners are encouraged to consult their own lawyer, accountant or other advisor before making any financial decision. Thank you for listening to Revamping Retirement.