Considering the "war, consumer debt that's increasing, declining job growth, declining pay in the jobs that are growing, prospects of increased interest rates...what would your view be about the investment future for the next five to ten years in view of all these negative factors going on?"
As we contemplate uncertain times with the S&P 500 down nearly 20% year to date, wouldn’t you like to ask a knowledgeable person the above quoted question? Well, a worried middle-aged man did ask Warren Buffett that question…in 2004.
You can listen to Buffett’s reassuring response for a long-term investor in the video. Also, we now have the benefit of knowing how the “the investment future for the next five to ten years” played out. Ten years after the May 1st, 2004 question, the S&P 500 was up nearly 70%. However, let’s add more color. The man did ask about five years later, too, did he not? Five years after the man asked the question of Buffett, the S&P was basically flat!
What? The S&P didn’t move for five years? Actually, it steadily climbed until the autumn of 2007, and we all know what began to unravel then–the housing market, bundled mortgage shenanigans, etc.. The market sputtered in the autumn of 2007, and as the depth of the financial crisis became clearer, the S&P tanked until it bottomed in the spring of 2009, dropping about 56% from autumn 2007. So with all the worries of the day in 2004, ten years later the stock market was up nearly 70% but not without drama along the way. C’est la vie.
5 Year Rule
Who knows what the next five years will bring? My thoughts are if I need a certain amount of money within the next five years, I probably shouldn’t have much, if any, of that money in the stock market. For example, in September of 2021, I posted that my son was in the 9th grade so I was reducing the weighting of stocks in his college savings account and shifting the remaining stock position to defensive holdings. In fact, in December of 2021, I went even further by liquidating his equities down to 7% of the entire portfolio. With less than five years before college, I did not want to risk a hit to his savings.
In contrast, for retirement I’m targeting sometime in 2045. That gives me about twenty-three years. Accordingly, I invest each month. I buy into the Vanguard Target Retirement 2045 Fund (VTIVX) twice a month. Also, as of this past week, I initiated monthly purchases of Vanguard 500 Index Fund (VFIAX). Finally, I buy shares of Intel every month.
However, even with my retirement date over two decades out, the five year rule is important when I am making future value calculations. While I have a fair amount of time until the retirement target date, I actually have five years less than that to grow our wealth through investments. A 2045 retirement goal means I’ll have to make a major downshift from capital growth to capital preservation sometime in 2040. That only leaves about eighteen years for growth to plug into the future value calculator.
Times are uncertain–always have been, always will be. As for me, for the next eighteen years I’m adding to investments every month, come hell or high water. Of all of this I am certain.
With Love,
P. Gustav Mueller, author of The Present