Wednesday, December 18, 2013

Is a Dollar in Hand Worth Two in the Stock Market?

I know that there are people out there who do quite well and even make a living through the stock market, and I applaud them.  I wish I were so lucky.  I actually haven’t put a dime into my retirement account since September of 2007, which has helped me get a better gauge on my actual fund performance since it hasn’t been clouded by further contributions – my own or employer sponsored.

According to MarketWatch.com, “…taken in the aggregate, American 401(k) plans are largely back on track, according to the mutual-fund industry’s main trade group. In a report released this week, the Investment Company Institute (ICI) said that the average American 401(k) account balance reached $94,482 at the end of 2011, the most recent period tracked in ICI’s database of accounts.”

The article goes on to note, “That figure is up 89% from an average of just under $50,000 at the end of 2008, when the stock market’s recent tumble was near its nadir. Given that stocks have continued to rise steadily since the end of 2011 – the S&P 500 is up almost 40% over that stretch – the average 401(k) balance is likely to be considerably higher now.”

And while individual stocks or stock portfolios can certainly vary in their levels of success, this pinpoints an issue I have with putting more of my hard-earned money into the stock market.

5-year market returns
It’s amazing to me that even with as great as the market has been doing the past several years that my IRA is just now breaking past the point it was at nearly six years ago.  After I left the workforce in late 2007 to become self-employed, I rolled my 401(k) into an IRA.  Well, long story short, I’ve only just cracked the balance I was at toward the end of 2007 near the start of 2013.  In that five and a half year timeframe, returns were essentially flat although I was gaining a bit of share value through dividend reinvestment.

So it begs the question, if I put money that I might otherwise have sunk into the stock market into other areas, what would my return have been?

Credit card debt
According to CreditCards.com, which notes the TransUnion analysis of May 2013 credit files, the average credit card debt per U.S. adult, excluding zero-balance cards and store cards is $4,878.

Staying out of credit card debt is something that I put at the forefront of our family’s financial plan since there are few is any other options (with the exception of many stocks in 2013) that can provide the return on investment that comes with paying off credit card debt.  This is why every month I make darn sure our credit card bill is paid and paid in full.

So that dollar that I could have put into my IRA back in 2007 was instead put toward paying the family credit card.  With a 20 percent interest rate on that card, it means that single dollar paid toward our credit card may have saved us nearly an additional $1.50 in interest that we would have paid on it over that period.

Mortgage debt
Some of those investment dollars didn’t go toward consumer purchases and rather were put toward our mortgage.  Paying down our mortgage faster than necessary has been another financial goal that absorbed many of our investment dollars.  And while this might not seem the best option when mortgage interest rates are low, back in 2008, we locked into a 15-year mortgage with 5.375 percent rate, so it made more sense to pay this debt down quicker.

Therefore, we did this not only through the shorter term mortgage, which in essence, boosted our monthly payment but lowered our interest rate and overall interest paid on the loan, but also through additional payments.  Taking each dollar that would have remained fairly stagnant in the stock market over that five-year timeframe and putting toward our home saved us about 30 cents in interest.  Multiply that dollar – and the associated savings – by thousands and you can see how it made sense to keep our money out of the stock market.  And while things in the market have been great as of late, it doesn’t mean that I’m rushing to get back in, using the previous five-years as an example of just how volatile markets can be.



Disclaimer:
The author is not a licensed financial professional.  This article is for informational purposes only and does not constitute advice of any kind.  Calculations have not been verified by a professional.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.


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