you have Dow 20,000 envy?
heart, you might be richer than you think.
may have wished during all the hype over the Dow Jones
industrial average hitting 20,000 that you had been
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.
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.
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.
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
does this happen?
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.
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.
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.
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
are for fear
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.
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.
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.
the moral of the story is you don’t have to be a
wallflower during the Dow 20,000 celebration — but
party in moderation.