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Shaking up the Dow

by Don Current on March 9, 2010

Have you noticed the number of earthquakes we’ve had so far this year? The first notable one was in Haiti, and then there was the big one in Chile. It seems like there’s a news report of one every day. Just today there was news that a 4.4 magnitude earthquake hit just off Hawaii! Well, before you start buying MREs and install that bomb shelter because of the “End of Times” being here, let’s take a look at the facts. If you go to the U.S. Geological Survey’s (USGS) page on earthquake data you will find some interesting facts. We are pretty much having a normal year! Many of the earthquakes that have been reported have been in the 6 to 7 magnitude range. In an average year there are over 130 of those! And the 4.4 magnitude earthquake near Hawaii? The USGS doesn’t even track those outside the U.S. as of January last year unless they are felt or cause some damage. There are an estimated 13,000 of those every year!

What we are seeing here is nothing more than media hype. It’s the topic of the moment due to the devastation in Haiti. But to the average person living in the world today, it’s nothing that will affect you outside of the news.

So what does this have to do with our finances? A lot actually. It’s really the same thing with the stock market. There’s a whole lot of talk and media hype when the markets are “crashing”. In reality however, for the average person’s retirement savings, it shouldn’t mean a lot. Let’s take a look at the facts. I found an interesting blog (see below) where someone has kindly done that using the Dow Jones Industrial average for us with lots of nice charts and graphs. Let me cut to the chase for you though. On the average, the returns of the market over a 10 year period anytime between 1929 and 2009 have been about 10%. Further analysis of the data says that over half of the time, your 10 year return will be in the 10 to 20% range! None of the 10 year periods from 1929 to 2009 resulted in a loss.

What this tells us is that, media hype aside, the stock market is a great place to have your retirement invested FOR THE LONG HAUL. The key is that number one, you need to diversify your money. The Dow Jones is an average of MANY stocks. Number two, you need to be in it for the long term. Yes, there will be down years, but over the long term your money will grow. In fact, down years are great when you’re in the investing phase of your life. Even after you’ve retired, you’ll still be fine in the down years because ideally, you are going to be withdrawing your money over many years and you will be invested in safer, more stable investments. In the down years, you just need to be a little more frugal with your spending, but during the recovery years, you’ll be back to living off the interest and letting the principle remain.

In order to maximize your investments you need to invest in good mutual funds with long track records of performance.  You also need to have a variety of these mutual funds that cover growth, income, and preservation. The further you are from retirement the more agressive you can be with growth, but always sticking with mutual funds not individual stocks. And most of all… ignore the hype!

USGS earthquake data - http://earthquake.usgs.gov/earthquakes/eqarchives/year/eqstats.php

“Observations” blog - http://observationsandnotes.blogspot.com/2009/04/stock-market-returns-by-year.html