Think you would you be HAPPY earning less than 1% a year on your money? Many people are…and you might be one of them!
Look in your retirement plan, or 401k at work. Say we invest it in the S&P 500 Index at the end of 1999. Leave it there. You’re supposed to be a “long term” investor.
Here’s what happened:
In 2000 the S&P lost 9.06%
In 2001 the S&P lost 12.02%
In 2002 the S&P lost 23.15%
In 2003 the S&P gained 26.50%
In 2004 the S&P gained 10.70%
In 2005 the S&P gained 3.00%
In 2006 the S&P gained 13.62%
When you do the math, you’ll see that, after 7 years, you made a grand total of 3.8%.
Far less than one percent per year.
Now, you can run these numbers with $50,000, $100,000 or $500,000. Doesn’t matter. This has been happening in millions of 401k plans.
See, most people set up the investments in their retirement plan (or 401k) at work on their first day
and then never change it.
And 75% of all money invested in mutual funds sits in the same 500 stocks.
Now, the reason why this gets “hidden” is because we’re constantly adding our own money into the account every pay period.
Let’s create an example:
Start with $500,000 at the end of 1999.
Then, add the maximum contribution ($15,000) at the start of each year (that’s not really what happens, but watch how it shakes out).
At the end of 2006, your account would be worth $633,069.
Looks like you “made” $133,069.
Good, right?
Wait! $105,000 of that “gain” was your own money…from your paycheck. (7 years X $15,000).
Which makes the real gain $28,069.
Over 7 years.
Or a measly $4009.86 on average, per year.
Again, less than one percent a year.
After adding in your own money.
Can you retire on this?
By the way, if you had merely moved over from the S&P 500 (Large Cap) to the S&P 600 Small Cap back in 1999 (or even in 2000), you’d have made over 100% return on your money instead.
Don’t you wish someone was there to tell you that?