November - December 2018

Written by Keith Schwanz
From his column It's Your Money

its-your-money-11-18_article.jpgSometimes when the telephone rings, a pastor hears anguish in the voice of the caller. On this day, the voice was that of another pastor.

Just after the dotcom bust in 2000, my friend had received a quarterly statement for his retirement account. He groaned as he told me how much the value of his investments had decreased. “I’m done with the stock market,” he declared. I listened as he spoke with intensity; then I tried to put things in perspective. But he remained adamant about his decision.

A bear market is when a broad market index, like the Dow Jones Industrials or S&P 500, falls 20% or more from its peak. Surprisingly, since 1932, bear markets have occurred every four years on average. Following a typical down market, it usually takes almost two years before stock values return to previous highs.

Even with declining markets included in the calculations, the S&P 500 index of the 500 largest publicly traded companies has averaged a return of about 10% annually. Yes, bear markets happen and can linger for years, but the general trend of the stock market is up.

Navigating a Rocky Road

So what does an investor do when things get rocky in the stock market? I created a couple of scenarios to explore options some might consider during turbulent times using actual data for the funds and years being considered.

Suppose in 2003 a pastor began investing $3,000 annually in each of the three most utilized stock funds in the Nazarene 403(b) Retirement Savings Plan (a total of $9,000 annually). Suppose the pastor opened the annual statement in early 2009 and lamented when reviewing the investment return for 2008. In spite of the distress, if the pastor decided to continue to contribute the same amount to the same funds, at the close of 2017, the investment account would be valued at about $365,000. (Over this 15-year period, the pastor would have contributed $135,000.)

Yes, bear markets happen and can linger for years, but the general trend of the stock market is up.

In contrast, suppose the pastor freaked out and in early 2009 moved everything from the stock funds into the fixed fund option. This is what my friend considered in 2000. Suppose the pastor then continued making regular contributions to the fixed fund option instead of the stock funds. Using this scenario, the value at the end of 2017 would be about $145,000 (with personal contributions of $135,000).

In this brief study, staying with the three stock mutual funds resulted in the largest balance at the end of 15 years. This is true even when factoring in the effects of The Great Recession. In our scenarios, if the balances were all that had been saved for retirement, the first would provide about $29,200 annually; the second about $11,600 (assuming a 5% return over 20 years).

The Cost of Panic

A look at the aggregated data of the Nazarene 403(b) Retirement Savings Plan suggests that during The Great Recession some participants acted in ways described in the second scenario. Contributions to retirement accounts decreased about 12% between 2008 and 2009, and some people stopped making contributions or reduced the amount being saved. Further, in the first quarter of 2009, over 47% of the contributions were directed to the fixed fund. When things got scary, some folks pulled out of the stock market and ran to the option that failed to keep up with inflation in the past several years. For these persons, responding to the emotional upheaval that accompanies market jitters cost them dollars as well as sleep.

At the end of 2018, geopolitical events have many people in edge. Financial analysts look at economic data and market trends and warn that a downturn may be ahead. No one can predict the future, of course, but we could experience a bear market in the months ahead.

Personal circumstances should be factored in, so no one can definitively declare the best route for everyone. Given past experiences, however, many people would do better by holding steady even when their quarterly statement announces bad news. As Aesop said millennia ago, “Slow and steady wins the race.”

Keith Schwanz is a writer and editor. He previously served the church as pastor, church musician, and seminary educator.