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Gail MarksJarvis: Think you missed the Dow 20,000 party? If you have a 401(k), you likely benefited

McClatchy-Tribune Information Services

Jan. 30, 2017


Do you have Dow 20,000 envy?

Take heart, you might be richer than you think.

You may have wished during all the hype over the Dow Jones industrial average hitting 20,000 that you had been buying stocks.

But you may actually own stocks without knowing it. If you’ve been dutifully putting a little money into a 401(k) or other retirement fund at work without paying attention to where it goes, you may very well have a good chunk in the stock market. It’s become common in the last couple of years for large companies with 401(k)s to simply route a little of every employee’s paycheck into what’s known as a target-date fund. And if you have one of these funds, you do own stocks and you’ve become a little richer as the stock market has soared 10 percent since Donald Trump was elected president.

On average the stock market climbs 10 percent during an entire year, so making 10 percent in just a couple of months is unusual. During all of 2016, the stock market gained about 12 percent — a very good year.

So you’ve done well if you’ve been working at a place that’s been putting your money in one of these funds for several months or years. Consider a worker who is now about 25, with a fund that is set up for a person who is going to retire in roughly 40 years. That fund might have the number 2055 in the name, because it’s designed for a person retiring at around 65 years old — give or take a couple of years. If you had $1,000 in one of those funds on the day of the presidential election, you’d likely have about $1,060 now, according to Morningstar.

Over long periods of time, the impact of the stock market is even more pronounced. A person who had about $10,000 in one of these funds 10 years ago and then never added another penny would have over $18,000 now, according to Morningstar.

How does this happen?

If you pick a target-date fund on your own, or if your employer picks it for your workplace 401(k) based on the year you will approach retirement age, most of your money will be put into the stock market.

At about age 25, about 80 percent of your money will be deposited into the stock market, because young people get the biggest bang for their buck in the stock market and can recover later if stocks become losers for a while. The other 20 percent goes into bonds.

For people within a few years of retiring, the funds geared for retirement take a different approach. They ratchet back stock exposure in favor of investing options that are more conservative, putting only about 60 percent of your money in the fund into stocks. The reason is that stocks don’t always climb like they have during the last few months, and if they go into a losing period, people on the verge of retiring might not have time to wait for another benevolent period.

So let’s assume you are about 25 and started 2016 with $1,000 in the fund and didn’t add another penny during the year. The fund manager handling your money would have put $800 of your money in stocks and $200 in bonds at the beginning of 2016. And now you’d have about $1,160. Most of the increase in your money would have come from the stock market. During 2016 alone, money in the stock market grew by about 12 percent, while bond gains were tiny by comparison — only about 2.6 percent.

Bonds are for fear

If you are like most people, you like making money. So after watching the celebration of Dow 20,000, you might conclude that you should put every penny of your savings in stocks. But there’s a reason why a fund designed for someone at 25 has about 20 percent of the money invested in bonds, rather than using only stocks: Not all time periods are like the present, and you never know when the stock market will turn cruel.

About every five years, and when no one is expecting it, a cruel period shows up called a "bear market." It can destroy a lot of your money quickly and make you think it will never come back again. Historically, money lost in the stock market does come back, but it can take more than a year before you regain what’s lost and start making money again.

Consider the horrible bear market that came along with the housing crisis and Great Recession of 2008. The person with $10,000 invested entirely in the stock market lost so much they had only $4,980 left at one point and they were still waiting for a recovery after three years. The person with 80 percent in stocks and 20 percent in bonds didn’t lose as much. At the worst point they had $5,980 of their original $10,000 left. And in a couple of years, they’d recovered and were positioned to make money again. And the person with only 60 percent in stocks at the beginning of the stock market plunge recovered in about a year and half.

So the moral of the story is you don’t have to be a wallflower during the Dow 20,000 celebration — but party in moderation.