It's amusing to me to hear some experts talk about how investors' conservatism will hurt them in retirement, while other people claim we would be better off putting our money under a mattress. However, if it's true that a train wreck awaits American retirement, I won't be laughing.
According to a recent survey by Bankrate.com cited by USA Today, 76 percent of investors aren't willing to put more money into the stock market for fear of a market crash. Essentially, the lack of confidence in the stock market his year is the same as it was the prior year. I know I have just barely recovered from the last stock market crash. I'm not ready to watch my investment accounts shrink by 50 percent again. Instead of trading stocks and exchange-traded funds, I'm simply investing in index funds.
Banking on past performance
I think the No. 1 flaw with the American retirement system was summed up best by John Bogle, the founder of the Vanguard Group. Bogle was interviewed for a PBS Frontline piece about the "retirement gamble." He says the retirement system is doomed because it's based on the idea that if the market did well in the past, it will do well in the future. I always hear disclaimers about how "past performance does not guarantee future results." However, everyone seems to ignore that possibility. I am banking on the historic returns of the stock market by investing in index funds. I recognize it as a gamble to own specific individual stocks, but it's less of a gamble to invest in the market as a whole.
Investing for the long term
Another lie that I was led to believe when I first began investing is that I could depend on the magic of compound returns. However, as Bogle points out, compound returns get eaten up by compounding costs in mutual funds and other managed funds. Even though I could invest over the long term, I have no way of knowing if I'll get the kind of returns people got in the '80s and '90s when the stock market was booming. With index funds, I don't have to pay the same kinds of fees and expenses as I do with many mutual funds in my 401(k).
Depending on dividends
I'm skeptical that I'll be able to depend on dividend stocks and exchange traded funds. I invested in one company last year thinking I'd receive a nice dividend payment every quarter. However, after owning the stock for just a few weeks I learned they were going to suspend the dividend. According to Bogle, the dividend yields in the late '70s were about 6 percent. As the years went by, the dividend yield decreased. In fact, many of the dot-com stocks don't pay any dividends.
To get away from the gambling mentality, I'm investing in index funds with a discount brokerage firm. I have the freedom to trade or move money around if I want to, but I resist the urge to "gamble."
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More from this contributor:
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