 | | ILLUSTRATION: TAMMY LIAN FOR THE WALL STREET JOURNAL | | |
Week 1: Reasons to Be Optimistic About Stocks | | |
| Do you want the good news or the bad news first? The good news, of course. Owning stocks has been a reliable way to build a nest egg in the long run. As jittery as one might feel about the latest news headlines, there is just no comparison between keeping money in the bank and buying and holding a basket of American companies' shares. | | |
| If you had invested a dollar in the stock market at the beginning of 1928, less than two years before it crashed and the Great Depression began, it still would have turned into $5,929 by the end of 2020. Putting the same amount in supersafe U.S. Treasury bonds would have left you with just $537. The bad news? You have to put up with some scary moments to capture stocks' amazing return. Over that period there have been 21 bear markets, defined as at least a 20% drop in the S&P 500 stock index from peak-to-trough. And there have been 33 corrections—drops of between 10% and 20%. When you put your money in the market, you take the bad with the good. It's hard for people to set the right expectations and think about returns in the long term. This week, we'll do an exercise that will help you get in that mindset and challenge your preconceptions about investing. —Spencer Jakab, Investing Columnist | |
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| This week's challenge teaches you about: Stocks' value over time. | | |
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| ⏰ Suggested time: 20 minutes Step 1: Imagine a pile of money. Imagine you have a rich relative. They leave you $10,000 in their will when you're 35 years old that you decide to stick in an S&P 500 index fund in a tax-free account until retirement day at age 65. | |
| Step 2: Close all your browsers. No googling on this one. Get a pen and paper and close your browser. | |
| Step 3: 📈 Up or down 📉? We'll pick five points in history for your investment to start and tell you what the news headlines were around that time. Now write down how much your relative's $10,000 would be worth at the end of those 30 years with dividends reinvested. - It's March 1991 and the U.S. is in a recession. The savings-and-loan crisis is raging and unemployment is 6.8%. It won't peak until the following June when an upstart third-party presidential candidate, Ross Perot, warns about the dangers of the national debt. The next 30 years would witness the dot-com crash, the 9/11 terrorist attacks, the global financial crisis and, most recently, a global pandemic. How much money do you think you had in March 2021?
- It's December 1969. The Vietnam War has years to run and there are big demonstrations against the draft lottery that began earlier that year. Inflation is on the rise and the U.S. dollar will be taken off the gold standard in a couple of years. The coming decade will bring Watergate, two energy crises, two recessions and—worst of all—disco. How much money do you think you had in December 1999?
- It's June 1932. Banks are failing all over the country, unemployment is over 20%, and Adolf Hitler is on his way to becoming chancellor of Germany. He will invade Poland in seven years, triggering World War II. How much money do you think you had in June 1962?
- It's November 1957 and we like Ike. The U.S. economy dominates the world. The interstate highway construction program is beginning, the U.S. is investing in the space race with the Soviets, and the jet age is about to really take off with the first flight of the Boeing 707. How much money do you think you had in November 1987?
- Okay, maybe this one is too easy. The stock market is booming, a wonder technology called radio is transforming the world and Herbert Hoover is getting high marks for his stewardship of the economy—but it's August 1929. Cue ominous music before checking your account balance in August 1959.
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| Step 4: Pick a winner. Now, write down which of the scenarios above was the biggest winner (the one that made you the most money) and the biggest loser (the one where you lost the most money). | |
| Step 5: What did you guess? Here are the answers to our pop quiz: - Congratulations—you have $180,690! You can afford four Teslas. 🚗🚗🚗🚗
- Not too shabby! You have $443,670 and can open up that Blockbuster Video franchise you've had your eye on. 📼
- Are you sure you're not a market timing genius? You have $519,931. 💰
- Ouch, that stock market crash sure stung. Even so, you have $179,343. 💵
- Hey, that actually wasn't so bad—you have $88,301. You can afford seven average U.S. homes with change left over to pick up a lightly used Edsel. 🏡
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| Step 6: Look at your results. What did you learn? One conclusion is that your relative's inheritance multiplied in value even when invested at the worst possible point in history if left undisturbed. Another takeaway is that bad times can be good opportunities to invest a lump sum, but not always. Today's mood doesn't mean much. We don't have a time machine, but we do have something sort of like a crystal ball. Before he won the Nobel Prize, Yale University economics Professor Robert Shiller published a downer of a book with perfect timing, "Irrational Exuberance." It came out in March 2000, the month that tech stocks peaked. He has popularized a way of telling how expensive or cheap stocks are based on a price-to-earnings ratio that spans the prior decade rather than just a year—the more common but less-meaningful number you'll often hear financial talking heads cite. The Shiller P/E is no market-timing tool, but it does give you some idea of what to expect. For example, looking at the ratio going all the way back to 1881 and comparing it to stock returns for the next 10 years at each point in time on a rolling basis, adjusted for inflation, there's a clear pattern. The cheapest third of observations were followed by returns of 9.8% a year on average. The most expensive third had returns of only 3.7%. The bad news is that the Shiller P/E happens to be very high at the moment. | |
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| | ❓Questions to Ask Yourself❓ | | |
| 🤔 So does this mean I should put all my money in the bank and wait for a crash? No. As they say, the key to making money is "time in the market, not timing the market." Instead, you should adjust your expectations. If you need a certain amount of money in the future, consider saving more. | |
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 | | PHOTO: PARAMOUNT PICTURES/EVERETT COLLECTION | | |
| My favorite movie about money is the 1983 comedy "Trading Places" starring Eddie Murphy and Dan Aykroyd. Murphy's character, a homeless man, becomes a master trader. | |
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| 💡 COMING NEXT WEEK: Pick a stock, but not just any stock. | |
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