Friday, January 8, 2010

If you'd invested...

I always hate it when people argue that "if you'd invested X dollars Y years ago, then you'd still have X dollars today" after a stock market drop. I hate it even worse when people talk about this as a reason that the stock market isn't a valid place to put retirement money.

These things only hold if you invest a chunk of money all at once and then have to pull it all out at once after a crash. Most people don't do that, and what is particularly relevant is that almost zero people do that with retirement funds.

Most retirement funds are invested as part of payroll deductions or at worst yearly contributions over decades. The stock market having the same value on two arbitrary days separated by 10 years has little to no effect on their retirement outlook.

This isn't to say that stock market drops can't screw up people's retirement plans. They sure as hell can. However, one can diversify much of that risk away and gradually transition to less volatile investments over time. And if some huge crash that affects all types of investments, including relatively safe ones, most people still don't have to cash out all of their investments at once. They can extend work a year or two or make some other temporary adjustments.

The thing for me between private retirement investments and social security is this -- one has investment risk that I can mitigate through risk selection, diversification, and additional saving and one has political risk that I can't anticipate or control. If they choose to cut social security on me, then I'm stuck.

I guess my point here is that even though the stock market appears more risky, it's a risk I can account for. What the government does is almost entirely out of my hands. I can't opt for a social security fund with less political risk.

Sorry, a discussion I just had set me off.

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