Stocks Do Rock
When you reach your own retirement age there is one statement I can guarantee will be true.
Nobody will cut their asking price for a car, a house or your dream vacation simply because you were risk-averse in your retirement investment choices. Your ultimate standard of living will be determined by your ability to pay.
The decision to keep 100% of your retirement assets in equities flies in the face of all traditional financial planning. No CFP (Certified Financial Planner) could pass their qualification exam by saying that was prudent advice.
That does not mean it is wrong, though. Financial professionals have to worry about being sued if things go badly in the short run. Individual investors don't have that concern. Their primary goal should be to maximize the total wealth they will have to draw on.
Many people have been playing defense with their IRAs/401ks for their whole lives. They were more worried about not losing than in truly becoming wealthy.
Vanguard Group reported that only 17% of investors had 100% equity allocations in retirement accounts even back in the heady days of 2007. Following the 2008-09 debacle, that number dropped further.
By the end of 2012 only 9% of Vanguard's retirement accounts were 100% committed to stocks.
The 10-year, 25-year and 35-year results show that workers who accepted volatility ended up far richer than more timid souls.
The most recent decade (through April 30, 2013) was hardly a historically good one for stocks. Shareholders needed strong stomachs to weather the Great Recession with its 50% plunge in stock indices.
Those brave hearts who hung tough now have almost 31% more money than people who hunkered down strictly in fixed income.
Over a quarter-century the excess return on $100,000 would have been more than half a million dollars.
Amazingly, after 35 years that edge was greater than $3 million. Please note these are not theoretical projections. They are backward-looking figures based on S&P 500's actual results.
I did not have $100K to my name 35 years ago. In 1982 I started an IRA with a $2,000 contribution. I kept funding it annually for the next 25 years. From day one I have been fully invested in value-oriented individual stocks.
I did not attempt to 'time the market' but stayed fully invested. The ride was sometimes wild but my account hit new all-time records last week along with the DJIA.
Proudly, my retirement account has performed even better than Morningstar's figures. It has almost quadrupled since December 31, 1999.
Barring total disaster I should be able to live quite nicely, strictly from that accumulated wealth, for the rest of my life.
I am not required to start drawing on my IRA for another eight years. Damn the volatility. The Rule of 72 says I can double again every 7.2 years at 10% average annual returns.
The question everyone needs to ask themselves is,
With bond rates now at generational lows, those who opt for fixed-income today may later discover that,
"The retirement account balance you see in your rear-view mirror may be smaller than it appears."