Looking at the quarterly statement, I shake my head, disappointment mixed with a small sense of despair considering what could have been. You see, among the many great qualities Mother taught me, there are some moments which stand tall among the rest. There was the time she went to work in crutches after spraining her ankle. Off she went
walking crutch-ing her way, half a mile to the train station to go clean hotel rooms. When I was in high school and she was laid off, one week into unemployment, she took a second shift job at a department store making half of what she was making before. When I asked her why she would take a lesser paying job rather than wait it out for a better opportunity, her answer was simple:
It’s too much of a risk.
Mother was always risk-adverse. She reasoned that a big part of the job is just showing up. By taking the job it would keep her moving and that may lead to another opportunity. Opportunities are not going to find you sitting at home, you have to put yourself in a position to get lucky. This discipline allowed her to save a portion of EVERY paycheck because “you never know what could happen”. Her main form of investing was a simple savings account. She liked the idea of having easy access to her money, and while the interest rate was low, she was was ok with this as long as “the balance did not decrease”.
Once Bitten Twice Shy
Later on Mother obtained a lucrative position at a luxury hotel and for the first time had access to a 401k plan. She questioned if she should participate (YES!) and her main concern with investing was “can the principal decrease?”. I explained how the funds in her plan worked and after much convincing she (nervously) invested in an equity portfolio. Late in 2008 she had $2,000 in her 401K, and then the Great Recession happened. In the span of what felt like overnight her balance fell 35% to $1,300. In a state of confusion sprinkled with panic, she was eager to switch her holdings to the “safer” savings account-like, money market account. I urged her not to and explained the cyclical trends of the market. I reasoned:
- Dollar-wise, while I’ll take $700 if you send me a check in the mail, it is a minuscule amount relative to your investment horizon, and historically the market would rebound. Being at least 15 years away from retirement she had time on her side.
It’s too risky, I’ve already lost money.
- I explained she had the same amount of shares as she did previously. While counter intuitive she should buy MORE, not less. This is the equivalent of being at BJ’s Wholesale Club and the products you were already going to buy are suddenly at a discount.
- I remembered when I was younger she had bought several government bonds and suggested investing in a bond instrument within her 401k. It would be less volatile than the equities market but offer a better (albeit slightly) return than a money market account. Still skeptical, I suggested a better approach would be to pause her current contributions and wait for the market to rebound. Once back at the $2,000, she could break even and then move her funds. To sell now and move to a money market account, she would be “locking in” the loss. It would be to much of risk to cash out now.
No, I need to save what’s left.
Try as I might, she took the loss, and while she continued to contribute funds to her 401K, she never invested into anything outside of the money market. Looking at the historical returns, had she stayed the course and not invested another dime, by now her investments would have more than doubled. Granted this is coming off of one of the longest bull markets in history but, you can’t win the game if you don’t play.
Even when presented with this graph and understanding the figures, the idea of investing is still a bit frightening. I periodically try to get her to invest– even if it’s a small amount in a CD. In most cases I think everyone should be investing, retired or not.
178 years to save your way to $1 million
Reading The Millionaire Fastlane by MJ DeMarco I came across the following table. Common jobs, along with how long it would take you to earn a million, as well as how long it would take you to save a million dollars at a 10% savings rate (current US savings rate 8.8%, source: St. Louis Fed, BEA)
With the average US HHI at ~$56,000, and a savings rate of 10%, do you have 178 years to save your way to $1 million?