But the market is up over 50% from its March lows, this is good isn’t it? Well for those who managed to stay in stocks or switch back to stocks at some point since March this rally has been impressive and great for a person’s retirement savings (unless of course things fall apart again). Today, stocks are now trading at around 20 times trailing 10 year Price/Earnings, whereas in March they were at around 12. Research shows that the higher the P/E you pay, the lower your returns over the following 20 year period. In other words retirement participants could have expected more money in retirement if they were given more time to invest at the March lows. Let’s pretend the market stayed where it was at in March of 2009 and slowly rose over the next 20 years – retirement plan participants who have money taken out of their paychecks would be investing at much lower prices and thus could expect a higher rate of return. Now that stocks have risen to full value (many would argue they are overvalued) the return that can be expected is much less (and the downside much greater). In other words, this quick rise in stocks destroyed one of the best opportunities for retirement plan participants to create wealth for their retirement, by investing at low prices (remember, buy low, sell high!).
If this Bull market has done anything it has perhaps bailed out some investors who can now sell into the market and reduce their risk exposure to what is more appropriate for them. Hopefully a lot of investors are able to take advantage of this, but retirement plan participants who need to contribute for the next 20 years should be hoping that stocks fall, giving them the ability to accumulate at reasonable prices – which will create much more wealth for them in the future then this current bull.
Scott Dauenhauer CFP, MSFP, AIF