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Plan Well, Retire Well

Saving and investing your money

A historical (NOT hysterical) view of the current market: David Sinow

David Sinow, a clinical professor of finance at the University of Illinois at Urbana--Champaign with years of experience in investments and advising clients, has provided an interesting and, I think, useful perspective on the current turbulent stock market. For most individual investors the first two weeks of October 2008 have brought a lot of bad news regarding the performance of their funds. Many of us have lost significant amounts of money over the past year in our retirement accounts and our other investments. Sinow, in an article posted at argues that a long-run historical perspective argues for being in the market over the long-run. He points out that a dollar invested in the stock market in the 1920s would, having gone through the Great Depression, WW II, and a number of post-war recessions, would be worth between $5,000 and $6,000 today. That completely dominates the return of an alternative investment that only kept pace with inflation, which would be worth about $14, according to Sinow. The point is to keep your risks in perspective -- a major risk is actually inflation, and remaining in the market, even buying in today's market of lower prices for equities, will help combat that risk. Sinow also argues that the other big risk for most small-time investors is our life expectancy, which for most of us is surprisingly long. This fact again argues for equities and their importance for long-term investors.

In reality most of us are long-term investors, even retirees and people within a few years of retirement, because our life expectancies run out into the future and we will rely on our investments to carry us for a long-time. This supports an approach of dollar-cost averaging, as well as building in the ability to weather short to medium term (for Sinow, short to medium term means up to 48 months) market downturns without having to sell positions simply to survive.

The markets have been brutal recently to individual savers and investors. Taking a long-term historical view, not a hysterical response, may be the soundest approach possible given the circumstances.

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