When will You get Your Nest Egg back?

The question on many baby boomers lips is, “when will I get my nest egg back?” This is a perfectly reasonable question given that most stock markets have fallen almost 50% since their highs in November 2007.

Your friendly financial planner will tell you they have managed to protect your nest egg from the excesses of the market down turn because the average fund is down only 20%. But what does this really mean?

If you had a “balanced portfolio” then it is likely that 70% of your money was in equities. So taking a $1M portfolio, $700K was invested in risk based assets.

The market was down 50% from its peak so that $700K is down by half to $350K.

Now by my reckoning the $1M portfolio is now reduced to $350K + $300K which means there is only $650K left. So how come it is down 35% vs. the reported fund average of 20%?


The only explanation have is that fund must skim off profits for a “Rainy Day” and use those profits to “smooth out” bad returns so you don’t get scared off and redeem your money. This theory may have some credibility after reading  Australian stock markets returned an average of about 26% per year from 2003 to 2007, but funds only managed an average return of 17% for each of those years. The S&P 500 made no returns during that period.

I think they just used up their profit buffer this year to get to average losses of 20%. So if 2009 is bad we can expect the true returns to be reported.

Back to my question. If the stock market has lost 50% (it makes the math easier and is not far from the reality anyway) then it needs to make 100% return to get back to even. Many people do not understand that. They think if you lose 50%you only have to make the 50% back and you are even – not true.

As I said previously the Australian stock market did in fact make 26% per year from 2003 to 2007. So it is possible. This is unlikely to be repeated in 2009 through to 2013. If it were it would still take 4 years to get your nest egg back to the same nominal dollars it is now. This ignores inflation, fees and you drawing a pension. It also assumes the funds give you all the profits and don’t skim for a “Rainy Day”.

Wealth managers tell us that we can expect to average approximately 10% returns per year over the long term. Using these figures it will take you 10 years to get your money back.

They also say that we can expect to have some losses every 5-7 years on average. So in the good years we have to make much more that 10% return to cover the bad years.

Investing this way is just an emotional roller-coaster. You spend much of your time wondering when you will break even again.This is not investing it is gambling.

In researching for this post I came across a web site that does a great job of explaining the problem with real stock market returns and assumed inflation. The article is written by Chris Ciovacco, the Chief Investment Officer for Ciovacco Capital Management. Take the time to read the article and see how returns and inflation can affect your nest egg over the long term.

Quarantining means leaving equity funds with large accumulated losses alone and not cashing them out unless you have an opportunity to invest in something that really will compensate for the losses and provide high returns.

The probability is that it is going to take maybe 10 years to get your nest egg back. What this means is you need to quarantine the risk based assets in your portfolio and then look at alternative investments for the money in safe assets as they will not provide the high returns you need to help recover your losses.

It may take less time to recover your nest egg if you are still contributing to your portfolio and some of the funds are being allocated to equities. But all you are really doing is shoring up your portfolio and replenishing your portfolio from other funds to cover your losses. Let the markets tell you they are going higher before committing more funds to them.

I’ve already suggested you consider Dan Amerman’s course on how to use inflation to your advantage. It seems that if we have high inflation it will be easier to make money by borrowing other people’s money and investing it in tangible assets rather than investing your own. If President Obama does spend $1 Trillion of money he doesn’t have to try and get the economy working again then inflation will be the only way the government can pay for it.

Just make sure you are on the right side of an inflationary economy and have it work for you. This may be your best opportunity to get your nest egg back.

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