By JLP | August 23, 2007
As controversial as yesterday’s post was, it did raise some interesting questions:
What if you’re too scared to invest in stocks?
Can you meet future goals like retirement without stocks?
Of course the answer to the last question is yes. Yes, you can still reach your financial goals without stocks – it’ll just take A LOT more money! How much more? Well, take a look at the graphic I put together in Excel:
As with all hypotheticals, I had to make some assumptions:
1. To arrive at my expected rates of return and expected inflation rate I used the numbers found in Morningstars SBBI 2007 Yearbook:
2. I assumed that the person in this example is in their 40s and has 20 years to reach their goal, which is $1,000,000 in today’s dollars.
3. I assumed that they currently have $100,000 in savings that will be applied towards their goal.
4. Finally, I assumed that 100% of the money was invested in each asset class in each example, which isn’t realistic in real life. Most people would have an asset allocation plan utilizing different asset classes and not put all their money in T-Bills, Bonds, or Stocks.
As you can see from the first graphic, this person would have to save $55,400 per year if they wanted to reach their goal without using stocks. That’s more than $4,600 per month! So, although it can be done, I wouldn’t advise it since most people still need to eat and have a place to live and clothes to wear!
The Large Company Stocks example still requires annual payments of over $18,000 ($1,500 per month), which is still pretty high but within reach with company matches.
All this brings us back to the first question, which was “What if you’re too scared to invest in stocks?”
My advice: get over that fear! Read books on long-term investing to familiarize yourself with how stocks work. You can do a lot to spread your risk by buying an index fund rather than individual stocks. Just be sure to keep your expenses low. Finally, when the market is down, take a look at this chart, which details the inflation-adjusted 20-year rolling period returns of large company stocks. Over the long-term stocks rule.