Today, Jeremy Schneider shares the four biggest lies told by stock market charts.
He breaks down “lost decades” and why your investment returns likely don’t match what you see in stock market charts.
Jeremy also answers two questions from listeners on shifting investing strategies after becoming wealthy and Roth IRAs vs brokerage accounts.
If your retirement dollars are invested in the stock market, today’s episode is for you.
How to Listen to Today’s Episode
Episode Links & Resources:
- 👉 Get Your One-Time Retirement Plan
- Jeremy Schneider
- S&P 500 periodic investment calculator
- The Lost Decade
- The lies told by stock charts
The Four Lies Told by Stock Charts
Jeremy Schneider: Lie number four told by stock charts, which is they almost always show a very short timeframe. Sometimes just the day, you know, just what the, has the market done today, or sometimes it's year to date or sometimes it's a month. But very rarely do you see in the news a stock chart that shows a 40-year time period.
Welcome to the Stay Wealthy podcast with Taylor Schulte. As you may have noticed, this is not Taylor Schulte. My name is Jeremy Schneider, filling in for Taylor for the month of July. This is my third of five episodes I'll be doing in July. Taylor will be back in August.
You can find notes for the show and any resources I mention at youstaywealthy.com/77.
So this week I want to talk about stock market returns versus your returns and some lies told by stock charts. So you've all seen those stock charts. If you go to Yahoo or CNBC, they might be on the screen or at the bottom. And there are these really jagged up and down charts.
And so the stock charts tell some lies, which I want to go over and I think it's helpful to tell a story and to look back in time. And so I wanna tell a story about the lost decade from the year 2000 to the year 2010 is often referred to as a lost decade because the stock market basically didn't return positive value during that time. We analyze it.
So I'm gonna go go through some numbers here. I'm, I know you can't see them, so I'm gonna do my best to illustrate them with my voice.
So the share price of the S&P 500 on January 1st, 2000 was $1,426. And on December 31st, 2010 was $1,110. So it was down 22%. The share price was down. And by the way, the S&P 500 is a list of the 500 biggest companies in the US more or less.
And the share price is just kind of some combination of their weighted market caps of price assigned to the value of those cumulative 500 companies. It doesn't really have any specific meaning other than relative to itself.
And so from the year 2000 to the end of 2010, it was down 22%. But that takes us to lie number one, that stock charts tell, which is the Y axis, does not go to zero. So when you look at a stock chart and you see these like big up and down jagged drops, and if you were to look at the stock chart I just mentioned over the year 2000, it would look like you basically lost all your value because the price went from 1400 to 1100, more or less.
But the chart might stop at like 1000. It doesn't show the zero number. And so what that does, it basically zooms in on the volatility. It makes all these jagged up and downs look really, really volatile when in fact being down 22, 2% over 10 years is bad, don't get me wrong, but you didn't lose all your money. And that's even more obvious when you look over a very short period of time.
So if you look over a week and the market's down 3%, the stock chart is gonna look like it fell off a cliff and went from the top to the bottom in just a week. But if you zoom out and you have the zero on the Y axis, a 3% drop is very, very small. It wouldn't even look like anything. And I think that's why stock charts don't show up just because it's not very interesting, it doesn't show much and investing over short periods of time isn't very interesting.
That's lie number one. The waxes doesn't go to zero. So let's assume on January 1st, 2000 we invested $60,000 in the S&P 500 based on the share price alone. After 10 years, we would be down to $46,704. So that's down that 22%.
But the share price alone is deceiving, which takes us to lie number two told by stock charts, which is they never include dividends or they almost never include dividends. Generally when you look at a stock chart, it's only charting the price. It doesn't show the dividends that are paid over that period of time.
So if you listen to the last show, you'll remember a dividend is when you own a stock and that company has profits and it pays back those profits to the shareholders in the form of a dividend. So if you owned the S&P 500 from January 1st, 2000 to December 31st, 2010, you wouldn't be down 22% because you would've been collecting those dividends all along the way.
And most people, when they get dividends, they don't just burn the money like the stock chart implies you are, since it doesn't even show that value, usually you would either take the cash and live off of it or you would reinvest it in the same thing.
So if you had an S&P 500 index fund, each time you'd give a dividend, you'd turn around and buy more of that same index fund. And so if you did that over that same 10-year period, instead of being down to $46,000, you'd be down to $55,792. So that's down 7%.
So it's still bad, don't get me wrong, to invest for 10 years and be reinvesting your dividends the whole time and be down 7%, that's not good, but it's not catastrophic either. It's certainly better than the stock chart shows. But that takes us to line number three told by stock charts, which is they never include recurring investments.
So no one on the face of the planet put every dollar to their name in the stock market on January 1st, 2000, and then it sat in their hands for 10 years and then sold it all on December 31st, 2010. That is not how normal investors behave normally, normal people, when they're in the wealth accumulation phase of their career, they're constantly reinvesting, they're constantly buying more of the same security.
And so when you look at the stock chart over a certain period, it's charted as though a hundred percent of the money is invested on day zero and then never again for the rest of the period of that stock chart.
But if you account for that and say, Hey, instead of investing $60,000 on January 1st, 2000, you put in 500 bucks a month over those 10 years, 500 bucks a month for 10 years is $60,000, but instead of being down to $55,000, you would be up to $63,912.
That means you have a gain of 7% over a 10-year period when the market was actually down 22%. That's the cool part about investing early and often because you're not putting all your money at the very beginning.
Sure you put a little bit in there, but then after the market crashed, during the first crash, the.com crashed, you would be buying low and then as it went back up, you'd be buying, you know, medium and high. And then there's the financial crisis in there, which is the second crash, which is why we were down 22% during that decade, but you'd be buying more at the bottom there, right?
That takes me to lie number four told by stock charts, which is they almost always show a very short timeframe. Sometimes just the day, you know, just what the, has the market done today? Or sometimes it's year to date or sometimes it's a month.
But very rarely do you see in the news a stock chart that shows a 40-year time period. But that same $60,000 that you invested $500 a month over the decade of 2000, 2010 today would be worth today being May, 2020, which is the most recent data I have, would be worth over $200,000. It'd be worth $207,000, which is a gain of 246%.
And so when you talk about the lost decade being a bad decade, yeah for sure it was because it had two crashes in there. the.com crashed in the financial crisis, one at the beginning, one at the end. But if you invested that whole period and then didn't invest another penny, that $60,000 would be worth over $200,000.
So it shows how you can make money even during this period of volatility, which we're also experiencing this year, for example, with the coronavirus. So the moral of the story there is really to be thinking long-term, not to be worried about the short-term volatility and to understand that the stock charts are kind of designed to show this very extreme volatility.
But the reality is if you just invest early and often, your own portfolio will experience better growth and better outcomes than this little very scary-looking stock chart shows.
Taylor Schulte: Hey everyone, I hope you're enjoying your time with Jeremy. I just wanted to pop in really quick and let you know that my firm is currently offering a free retirement checkup, which includes a 2019 tax return analysis.
As a reminder, we specialize in retirement planning for people over age 50 who have accumulated investments of $750,000 or more. If you're on the hunt for a retirement and tax planning expert and you want to learn more about our free checkup, just head over to definefinancial.com and click on the big purple button that says free assessment.
Again, that's definefinancial.com.
Jeremy Schneider: So I got a question. I have an Instagram account where I have a bunch of followers and I was posting about this and I got a question from one of my followers and he said something like, you shouldn't be suggesting people buy and hold right now because stocks are the most overvalued they've been since the 1980s, and why would you ever risk a 50% drop for just a 2% gain?
Those are all his numbers, those are his, which I agree with none of it, but let's just say that he's right. Let's just say that that's true, that stocks are in quotes, the most overvalued they've been since the 1980s. If you look at a stock chart from 1980 to 2020 with dividends reinvested, the market has gone way, way, way up. I would love to invest in 1980 today. Are you crazy? Let me put that in numbers.
Like let's say instead of investing at $500 for just 10 years, you invested at $500 a month for 40 years starting in 1980, which was the year I was born, by the way. So happy birthday to baby Jeremy. You invested $500 a month for my birth year in 1980 through today, you would have over $3.1 million.
And so when there's this like fear-mongering scare tactic of stocks are overvalued, who caress you? I mean, look how good it would've been if you invested last time, according to this one follower that of mine, if look how good it would've been last time, if you invested early and often during the most overvalued period, I mean, according to his assertion, it was more overvalued than than it is now.
So this is even a better time to invest. So what's really going on here is the market is going up because the market includes every single US and international stock that's constantly growing and profiting and innovating and hiring people and releasing new products and growing revenues and taking all that growth and plowing it back to their investors in the form of dividends and share price increases.
And you want to be owning all that economic growth. If you are jumping in and out or deciding that stocks are overvalued or trying to bet against the market that will hurt you. I have another story. I have another friend who is a great investor, but he's more of a real estate investor and he's a pretty wealthy dude himself.
And he, at the peak of the coronavirus mania, he was sure that the market was in a lot of trouble. So he bet against the stock market, you know, the stock market started to crash. He said, oh yeah, it's gonna get worse.
So he bet against the stock market and the market was, you know, went down about 30%, but guess what, right after that it went up about 30%. So as of today when I'm recording this, the market is about at its all time peaks, but we had a 30% or so drop, and then on almost immediate 30% or so gain.
And so if any point in there you were betting against the market, you were gonna get burned. And to do it right would've had to be this clear voyant, futuristic, speculative brilliance where you get it right on the beginning of the first crash, you get it right at the bottom of the of the second rebound.
And sure it's obvious looking back where those were, but going forward, you almost can never do that. So you're so much more likely to hurt yourself than help yourself when you're doing that sort of jumping in and outta the market. So that's my rant on the Lies Told by stock charts.
That brings us to the Q&A portion of today's show. And we have a question today from Kevin.
Kevin: Hey Jeremy, it's Kevin from Vancouver Canada. Your story's really inspiring. My one question is, has your investment philosophy shifted when you're managing less money as opposed to now?
Jeremy Schneider: So Kevin mentioned that my story was inspiring if you don't know what he's talking about, I started a internet company when I was in college when I was 34, I sold it for over $5 million and then I quit my job working for the company that acquired us when I was 36.
I don't think it's all that inspiring, but I think his question still holds like, do rich people invest differently than people building wealth? And my answer is no.
My strategy is the same. It is buy and hold index funds. There's only two real types of things you can invest in. Equities, stocks, and bonds and investment real estate. And those are the real two big asset classes. And that's true if you're a billionaire. And that's true if you are broke and opening your Roth IRA for the first time.
I think people think that at these different barriers, if you hit 1 million or 10 million or a hundred million, something magical happens and the, you know, the sky's open and you have this new found opportunity of wealth and that's not really true.
You kind of have the same choices. You can buy real estate, which might look different if you're super wealthy. You might be buying massive apartment complexes and more complicated legal structures, but that's still just giving you a return on your investment. And you might be buying a lot more of these stocks and companies, you might be have a lot more holdings in index funds.
Back when I was poor, paying myself $36,000 a year living just above the poverty line in San Diego. You know, I had 50 or a hundred thousand dollars in my index funds and now I have millions. And either way the same. You know, you just realize the growth you buy and hold. You think long-term the strategy is the same.
One more question today from Favi.
Favi: Hi Jeremy, thank you so much for letting us send you questions. My name is Favi and I'm from Los Angeles, and my question is, how much of my savings should I put into a Roth IRA account and a brokerage account because I know I wanna open both of those accounts.
Jeremy Schneider: So favi is asking about Roth IRA versus brokerage. Those are different types of accounts in which you can invest. So I always recommend doing things in the following order.
First, if you have any non-mortgage debt paid off, student loans, car loans, credit card debt, medical debt. If you have debt, it's like trying to swim a race with an anchor tied to your ankle.
And if you're trying to pay off the debt and invest at the same time, I think from a personal perspective it is a lack of focus and you're more likely to fall off the wagon and get more debt and not really get investing. So I think it's really important to pay off your debt first.
Second step, get some cash, save an emergency fund of at least three months of living expenses because being broke is expensive and if the next coronavirus happens, you don't want to not be able to survive three months before you have go back to credit cards or you have bank overage fees or payday loans.
Being broke in America is a very bad place to be. And so that's what the emergency fund is for. It's throw it in a savings account, forget about it, leave it there and you'll know when you need it. After that, I would max out all available retirement accounts.
And so Favi was asking Roth IRA versus brokerage account. I would tell her, Hey, put all of your first $6,000 in a Roth. IRA government has said, the most you can contribute this year to a Roth IRA is $6,000. And that's a use it or lose it limit.
So you can't come back two years later and say, oh, I didn't put, I didn't put $6,000 in for 2018, let me put it in now. That's not how it works. After tax day next year, you cannot contribute anymore to the 2020 Roth IRA and the Roth IRA has another cool benefit, which is you can take the principle out any time with no tax or penalty.
So if you put in $6,000 this year and for the next two years for a total of $18,000 and then you have $10,000 of additional growth in those investments, you can go back and take the original principle $18,000 out any time, no tax, no penalty. I don't suggest you do that. I think you should leave it in for the long term to maximize your investment growth.
But don't be too afraid about investing inside of a retirement account because having too much money in a retirement account is what I call a good problem to have. And then after you've maxed out all available retirement accounts, those are accounts like 401k Roth IRA, 403B SSEP IRA, and different ones apply to different people either have a 401K or a 403B, you generally would never have both and SEP IRAs for self-employed people.
And so you find out the ones that are available to you, you max them all out and then if you've maxed them all out, you've taken advantage of all the tax breaks the government is affording you, then you go to a regular taxable brokerage account.
And so that's kind of like the order I would do things to make sure you're not broke, make sure you're taking advantage of all tax breaks and then just go on a regular brokerage account. And a brokerage account has an investment cap of unlimited, you can put billions of dollars in a brokerage account and buy index funds or buy stocks and companies. But any growth in that regular taxable brokerage account is taxed.
So in the Roth IRA example, if you put $18,000 in and it grew to $28,000 at the age 59 and a half, you can take all $28,000 out and spend it on whatever you want.
But if all that money was in a brokerage account, the government would say, Hey, you earned $10,000. You made $10,000 there. That was your gain. You gotta pay US tax and the federal government and likely your state is gonna want a piece of that tax action which they would not get inside of a Roth IRA, which is why you prioritize it.
So that's the show for today. I have two more shows coming up in July and Taylor is back in August. If you're enjoying the show, I'd love to hear your positive feedback only please on my Instagram at Personal Finance Club.
If you're not enjoying the show, please direct all complaints to firstname.lastname@example.org. I'm just kidding. I love Taylor.
Again, if you want to see any of the resources I mentioned today, you can go to youstaywealthy.com/77. That's all I have today, and I'll see you next time.
Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.