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Getting back to zero
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More than one of my investing mentors underscore the point that return
of investment is more important than return
on investment, and this week's Money Blog underscores their reasoning - it can take quite a while to recover from losses, and once that time is lost, it's never coming back. Let's get into it.
THE SCENARIO
Back in 2007 - 2009, the S&P 500 (one of the 'benchmark' indices by which US stock market performance is measured)
lost 56.8% of its value. Like many people, I had a 401(k) that was nearly entirely invested in the stock market at that time, and my own retirement account value dropped precipitously, as could be expected.
The question: If I could reliably make 8% on my money after the crash, how many months would it make for my 401(k) to get back to its pre-crash balance? Ignore the effect of inflation - this question is about 'balance' and not 'value' - and assume that I do not contribute to my 401(k) after the crash.
THE SOLUTION
To solve this one, we'll look at the value of each post-crash dollar. Each dollar, post-crash, was worth 100 - 56.8 = 43.2 cents.
First things first, make sure the calculator is using 12 Payments per Year.
N: (this is what I'm trying to find)
I/YR: 8 (The question assumes that I can reliably get 8% on my money)
PV: -0.432 (Each pre-crash dollar was worth 43.2 cents after the crash)
PMT: 0 (I'm not contributing to the account while it recovers)
FV: 1.000 (Each post-crash dollar is back up to its pre-crash level at the end)
If I can earn 8% on my money, it takes my account balance 126.3 months to return to its pre-crash level. To put it another way, in September of 2019 (10 ½ years after March of 2009), my balance should be back where it was in October of 2007.
What do you think? Did you lose a lot in the 2008 crash, were you well-protected, or had you not yet started investing? What are you doing now to prepare for the next downturn? Let us know in the comments!
