Commentary: A Soaring Market Can Sure Bring You Down

I'm thinking about forming an organization called Stockholders Who Wish the Stock Market Would Stop Going Up So Fast. We're a little different. Most people who gripe about soaring stocks don't own any. Maybe they never got in. Or maybe they pulled out thousands of points ago in the Dow Jones industrial average. They're keeping their money in cash while praying for the market to falter so they can get in cheap.

My organization isn't for people like that. Mine is for people who have been putting money into the market right along. Every jump in the Standard & Poor's 500-stock index pumps up our 401(k)s a little more.

So what's our complaint? We think stock prices have shot up too much, too soon. We--who will not be retiring for at least two decades--would rather see these kinds of enormous advances occur two or three decades from now, when we have stopped accumulating stocks and we're ready to cash them in to buy our beachfront condos or pay those nursing-home bills.

PAINFUL RUNUP. Put it this way: For those of us who intend to keep buying stocks for years to come, the recent runup in prices is like a sudden hike in the price of a house we're buying. In other words, painful.

Sure, even boomers and Gen Xers occasionally benefit from the market's gallop. They may sell some stock to buy a house or pay for their kids' college educations. On the whole, though, they're accumulating as they age, not cashing in. In 1995, according to calculations by New York University economist Edward N. Wolff from Federal Reserve data, families headed by people younger than 35 had mean net worth excluding home equity of $29,000, vs. $380,000 for those 55 to 64.

Translation: The younger you are, the more upset you should be about the soaring stock market. After all, it's pretty clear that stocks can't keep recording 25% annual gains forever. The more the market goes up now, the less headroom it will have later. That implies low returns on your later-year investments.

Let's fire up our spreadsheet programs and consider two alternative scenarios. In one, the market goes up a strong and steady 9% every year after inflation. In the other, it shoots up 25% a year for the first five years, then rises a little over 5% a year from then on. To keep things on a level playing field, the market reaches the same height after 25 years in both scenarios.

Let's say each year you put into the market the equivalent of $1,000, measured in 1999 dollars. In the fast-then-slow scenario, your wealth grows to about $60,000 in real terms. In the steady-growth scenario, you accumulate about $84,000. No matter how you tinker with the assumptions, the steady-as-she-goes scenario always leaves you richer--40% richer in this case.

SAFE BET. Unfortunately, nobody's giving you a choice of scenarios. And right now, the one that's playing out on Wall Street is fast now, slow later. So, what to do? Recognizing that you're in it for the long term, you could seek out sectors that have underperformed and ought to catch up eventually. But you might guess wrong and wind up with the dogs of the 21st century.

The safest bet, then, is to set up a saving and spending plan that lets you achieve your long-term goals with a stock market that goes up 5% a year instead of 25% a year. Conservative? Sure. But after the latest stock mania, that might be all you're going to get for a while.

If this makes sense to you, maybe you belong in our organization. It doesn't actually exist, but if it ever does, I have the perfect slogan: ''Bah, humbug!''

By Peter Coy

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