If you’re thinking of pulling your 401(k) out of the stock market, or you’re too terrified to invest more, you need to meet my friend Betty Badluck.
Poor old Betty has had the worst luck of any stock market investor you’ve ever met. In the last 40 years she has invested in the stock market just six times. And on each occasion her timing was an absolute disaster.
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The first time Betty invested in stocks was at the end of September 1987. She’d been kicking herself for missing the great 1980s boom, and when stock prices started to come down late that summer she figured this was a great time to buy the dip. She invested $400, which is (adjusted for the consumer-price index) exactly $1,000 in today’s terms.
A few weeks later, on Oct. 19, the stock market staged its biggest one-day collapse in history, eclipsing even the worst day of 1929. Betty saw a quarter of her money wiped out in a blink of an eye.
Well, after that experience she didn’t want to go near the stock market again for years. It wasn’t until 1990, when the market had fully recovered, that she worked up the nerve to invest more in stocks. On July 31, 1990, she invested another $450 in the stock market, which (again) works out at $1,000 in today’s money.
A couple of days later, Saddam Hussein invaded Kuwait. Oil went through the roof, the stock market tanked, and the world entered a crisis.
Once again, Betty kicked herself as she saw some of her hard-earned money vanish before her eyes.
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She figured, fool me once, shame on you—fool me twice, shame on me. So after these two disastrous experiences she swore off the stock market altogether. And it was years before she even considered it. But throughout the 1990s she watched as the Dow Jones DJIA, +2.08% and the Nasdaq COMP, +3.03% went up, and up, and up, and up. They even ran commercials on TV bragging about how high the Nasdaq was going. And eventually this wore Betty down. At long last, after many years of refusing to throw another nickel into her 401(k), she gave in. 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!”) it had multiple Nobel Prize winners on its border. Everything collapsed.
You get the picture. Poor old Betty Badluck. She didn’t give up. But every time she plucked up the nerve to invest in stocks, it turned out to be a terrible, terrible moment. So she bought at the end of March, 2000—which turned out to be the peak of the long bubble and the beginning of the longest bear market since the 1970s. She bought again at the end of August 2001, just before 9/11. And she bought more stock at the end of August 2008, just before Lehman Brothers collapsed.
Her timing literally could not have been any worse.
But Betty did two other things.
The first is, she didn’t try to pick stocks, funds, or even markets. She invested in a global stock market portfolio that matched the MSCI World index, including U.S. and foreign stocks.
And after investing her money, and watching it plunge…she left it there.
What happened to Betty?
Well, thereby hangs a tale.
She did just fine.
Even though she picked the worst six moments since the 1980s in which to invest, she made an average profit over the next five years of 20% and an average profit over 10 years of 100%. She doubled her money. Despite her disastrous, terrible timing, she was in the black after five years on four occasions out of six, and in the black after 10 years 10 times out of 10.
Today, even though her total cash costs from those six investments totaled just $3,500, her portfolio is worth $17,500. That’s more than five times her investment. And that’s even factoring in losses this year, which have seen the global stock market — and Betty’s portfolio — fall 22%.
When adjusted for inflation, Betty’s portfolio is worth three times what she put in.
And remember, this is not an average return achieved by an average investor. This is the long-term return earned by the absolutely unluckiest investor in modern history. If you are too scared to invest in stocks right now because you fear — understandably–that the market may keep going down, ask yourself: Do you think you’d be as unlucky as Betty Badluck?
Actually, the global market has already fallen by more than a fifth, so it is impossible for you to time things as badly as Betty. You can’t be buying at the top because we are already a good distance down.
I have absolutely zero insight into the next one month, three months or three years. I don’t know which markets will do best, and worst, and by how much and when.
(Nor, incidentally, does anyone 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 recall only a couple of occasions in my career when people on Wall Street were panicking as badly as they are now: October 2008 and March 2020. Both turned out to be great times to buy.
Most important is that people saving for their retirement are not looking to make money on stocks in the next few weeks or months (lovely though that may be). They are looking to put away money so that in a few decades, when they are fed up with work and want to smash their laptop with a sledgehammer and retire, they will be able to open their 401(k) statement and see with great pleasure and surprise that they have accumulated a big fat pile of money.
In which case, they really have no excuse not to be buying right now. And if they don’t know, just Vanguard Total World Stock VT, +2.40%, or a mixture of, say, 40% iShares MSCI U.S.A. Equal Weight EUSA, +2.20% and 60% Vanguard FTSE All World ex-US VEU, +1.85%, will be better than nothing.
I am betting they will not be as unlucky as Betty Badluck.