Don't let fear of loss scare you off
Are you afraid to save money because you fear you'll lose your hard-earned cash if you choose the wrong investments?
If so, you have a lot of company. A full 38 percent of Americans share your fear, according to a recent study done by Aite Group on behalf of Chase.
People are afraid they will stick their money in the wrong place. And it's understandable that they would be traumatized. Just five years ago, Americans went through one of the scariest periods in stock market history as the country endured a financial crisis and severe recession. During that period, people lost more than 50 percent of the money they had in the stock market. A $10,000 investment before the crisis would have turned into less than $5,000 at the worst point in the crash.
Research done in the field of behavioral finance shows that our brains don't tolerate losses well. We humans are so afraid that we'll lose money that many of us will bypass opportunities to make the money we'll need for our futures.
Let's say you're 35, have been through the financial crisis, but managed to hold onto $10,000 and are set on never losing a penny. If you park that money for the next 30 years in a savings account, you may have about $13,500 for retirement if it grows at 1 percent a year. Even if you add $5,000 a year to that, you'll end up with only about $189,150 for retirement. If you're lucky, that might give you about $10,000 a year to live on.
Of course, there's Social Security, too — about $15,500 a year on average for current retirees. But could you live on about $25,500 a year? You might think that looks pretty horrible. Yet behavioral finance suggests you still might be telling yourself that at least you won't lose anything if you park your money in that savings account. After all, you say, “$10,000 a year is better than nothing.”
You are right about that: $10,000 a year is, indeed, better than nothing.
But there has never been a time when every company had stock that lost all its value. So the stock market isn't likely to go to zero. Even in the financial crisis, stocks for companies such as Proctor & Gamble, Apple and General Electric didn't go to zero. In fact, what happened is that $10,000, which turned into less than $5,000 at the worst point of the downturn, is now worth more than $12,000. The market has been climbing since 2009, and it always climbs after a period of destruction.
Although you can never count on the future to be exactly like the past, that recovery should at least provide some confidence. Historically, the stock market has averaged a gain of 9.8 percent a year — sometimes losing big; sometimes gaining big. With a gain like that, a 35-year-old with $10,000, who invests another $5,000 a year, could end up with about $1 million at retirement age. That would provide about $40,000 a year to live on. If the next 30 years are treacherous, and the investments gain just 5 percent a year on average, the final sum would be about $392,000. That's about $16,000 for retirement living expenses a year.
Gail MarksJarvis is a personal finance columnist for the Chicago Tribune. Readers may send her email at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- IRS cybersecurity breach touches lives of homebuyers, others
- Shoppers pay premium for organic chicken
- Pitt study suggests health law attracting young to balance insurers’ risks
- Many Americans have no retirement savings, Fed survey shows
- Task force to plot ways of alleviating gas glut in Pennsylvania via pipelines
- Automakers do U-turn on infotainment systems
- Apple finds bug that causes iPhones to crash
- Stocks bounce back from losses on reassurance from Greece
- Exxon, Chevron shareholders reject big oil restrictions
- Financial planning for disabled people a little-tapped field
- UPMC offering buyouts to 3,500 employees in cost-cutting move