Social Security Couple

Save Soc. Sec. for Later, When You Need It Most

Tim Maurer, Director of Personal Finance

I think we’ve been looking at Social Security retirement benefits all wrong. In the long-running debate about when to take Social Security — as early as age 62 or as late as age 70 — the focus has been on timing your claim to get the most money, in total, out of the social safety net.

This is a circular argument that will never be fully decided until the Social Security recipient in question dies. So let’s shift the focus from the question “How do we get the most out of Social Security?” to “How do we get Social Security when we need it most?”

Simply put, you’re more likely to run out of money at the end of retirement than at the beginning.

Behavioral science explains why we are all so prone to preferring money today over tomorrow. It’s called “hyperbolic discounting,” and behavioral economists plead that we meaningfully overvalue money now, unfairly discounting money later.

But the risk of making less money in your early retirement years is dwarfed in comparison to the risks of longevity and inflation in the latter stages of retirement. And the probability you will outlive your money meaningfully decreases if you wait to take Social Security.

Prove it!

Let me show you through an example that, while hypothetical, is no doubt close to reality for many.

We’ll consider three couples, the Earlies, the Fullers and the Laters. Each couple:

  • Retires with $1 million in tax-deferred retirement savings.
  • Has an identical 50 percent equity, 50 percent fixed-income portfolio.
  • Has a pretax retirement income need of $90,000 per year.
  • Will supplement their Social Security income with the retirement savings necessary to fulfill their income needs.
  • Includes one household member who will receive the maximum in Social Security benefits and one who will receive 50 percent of the maximum.

The only difference is that the Earlies retire and begin taking Social Security retirement benefits at 62, the Fullers at 67 and the Laters at 70.

This hypothetical case study is designed to result in an academic probability that each couple will not run out of money, and applies more than 3,000 iterations of randomized historical market returns for the respective retirees’ portfolio allocations.

Then, we show the likelihood that each couple will have at least one dollar left in retirement savings at the end of four different time periods — 20, 25, 30 and 35 years into retirement.

Therefore, if you see a result of 47 percent in the 25-year column of the table below, it means the couple represented still had at least one dollar left in their retirement savings at the end of that period in nearly half of the thousands of iterations run. In other words, that couple had a 47 percent chance of not running out of money 25 years into retirement. Statistically, a probability of 85 percent or better is favorable.

The findings

What did we find? If you die early enough — within 20 years of your retirement date — you have a reasonably good chance to outlive your money regardless of when you take Social Security. The Earlies hit the golf course fully five years before the Fullers, but it’s not clear that they’ve suffered for it at the 20-year mark.

At 25 years, however, there’s a greater than 50 percent chance the Earlies have run out of money and now must ask their kids to pay their greens fees. At 30 years their probability of solvency has dropped to 30 percent, and at 35 years they’re likely relying on their reduced Social Security benefit for all of their income.

Why do the Earlies fail? Because in order to meet their income needs with a reduced Social Security benefit, they put too much pressure on their portfolio to pick up the tab. They were forced to take an effective withdrawal rate of 5.62 percent in their first year of retirement.

How do the Fullers look? Pretty good. Buoyed by a Full Retirement Age (FRA) Social Security benefit and beginning with a reasonable 4 percent effective rate of withdrawal from their portfolio, at 20 and 25 years into retirement, they’re in the 90 percent-plus range. But if they plan on seeing their faces on a Smucker’s jar, their probability of success declines to 67 percent when they’re 35 years into retirement.

As you’d guess, the Laters are solid. Because of their increased Social Security benefit, they require only a 3.26 percent portfolio withdrawal rate in year one. Statistically, they ride off into the sunset and should have the funds to test the boundaries of science in their pursuit of longevity.

If you suspect you’ll die early — and have lineal or medical justification for that belief — you might justify taking Social Security as early as you can (although a lesser-earning spouse could still benefit from your higher benefit when you’re gone). And please forgive the inherent insensitivity in this analysis, which presumes the Earlies, Fullers and Laters all have a choice in taking their benefits at various points in time. Many retirees don’t, and if you need to retire and take early Social Security for any number of valid reasons, of course you should do just that.

But if you hope to have a longer retirement — 30 or 35 years, especially — your chances of not outliving your retirement savings improve greatly if you delay Social Security. Waiting is like purchasing longevity and inflation insurance for what will hopefully be a long and prosperous retirement.

This commentary originally appeared January 1 on

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

Can you pick the next winner

Building an Evidence-Based Plan

InFocus April 2017


“Control what you can control.” —David Butler, co-CEO, Dimensional Fund Advisors

By following the above five words from Butler, investors can help simplify their complex financial lives. Out of thousands of pages of scientific research, a cornerstone of evidence-based investing emerges: Control what you can control. Control the fees you pay and your trading costs. Control your tax efficiency and your asset allocation. Control how closely your emotions are tied to an up-and-down market. Bigger picture, you can take better control of your entire financial experience.

This month’s InFocus looks at foundational tenets of evidence-based investing to give you confidence when you think of where you are and where you want to go.


“Diversifying your wealth across a variety of market risks helps you remain on course and in the driver’s seat, even when the road ahead is uncertain.” —Manisha Thakor, director of wealth strategies for women, the BAM ALLIANCE

For an example of why we stress the importance of having an internationally diversified portfolio, just go back a few weeks. The first quarter of 2017 closed strongly for developed international and emerging markets (up 7.4 percent and 11.5 percent, respectively). This came when many investors had cooled on international stocks after they significantly underperformed U.S. markets from 2008-2016. But not so long ago (2002-2007), the MSCI World ex USA Index returned 128.7 percent compared with 42.5 percent for the S&P 500 Index. Diversifying your portfolio so it has exposure to both U.S. and global equity markets allows you to capture market upswings and withstand its downswings over the long haul.
Can you pick the next winner

All of this underscores the importance of being diversified and — the topic we’ll address next — being disciplined.


“Inactivity strikes us as intelligent behavior.” Warren Buffett

Buffett is really smart and really good at making money. But he makes an important point when it comes to someone having the ability to outsmart the market. “Success in investing doesn’t correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people in trouble investing.”

Too many investors buy stocks during upswings when all feels good and sell during downward spirals when uneasiness seeps in. This lack of discipline can cause investors to be on the sidelines when markets rebound, causing missed opportunities.

Cost of Mistiming the Market

The cost to investors when they miss the best one, five, 15 and 25 days of market performance during a 45-year period.

Patience and prudence are central to an evidence-based strategy. Stay true to your well-devised plan while rebalancing periodically. Doing so will keep your portfolio in line with your target allocations and will enable you to capitalize on buy-low/sell-high opportunities.


 “The makeup of your portfolio depends entirely on your unique ability and willingness and need to take risk.” Larry Swedroe

 Swedroe, a prolific author and the director of research for the BAM ALLIANCE, says the ability to take risk is largely defined by the investment horizon, the stability of an investor’s income and the need for liquidity. Swedroe says the willingness to take risk can be succinctly summed up through the “stomach acid” test. Can you stick to your plan even when the market goes down for an extended period? This includes rebalancing — selling what has done relatively well or held its value and buying what has done worse. The need to take risk is determined by the rate of return that is needed for you to reach your financial goals.

Part 1 The Ability to Take Risk

Of course, the word unique is critical as well. The ability, willingness and need to take risk are highly personal decisions. They vary for each investor’s specific circumstances. However, you can view general guidelines for prudent asset allocation decisions by clicking here or the image.


“It’s just fun to do research, learn new stuff, and potentially have an impact on the way other people are thinking about the world.” Kenneth French, professor, Dartmouth College

No room for speculation, prognostication or hunches, the evidence-based world is rooted in decades of objective research on the long-term behavior of financial markets. We use that evidence to tilt portfolios toward the asset classes that have delivered the highest returns over the long haul and should continue to do so. Click here or the image to see the return profiles of distinct asset classes during the period of 1931-2016.

This research leads to plans that keep costs low, minimize risk and implement tax-efficient strategies. The evidence results in portfolios that are diversified domestically and internationally. Those same portfolios use fixed income to dampen volatility and address the risk tolerance of each investor.

Asset Class Returns 1992–2016


Retirement Plan with glasses

UIT Managers Exhibit Poor Stock Selections Skill

Written by Larry Swedroe, Director of Research

Much—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.

I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:

1) Life is liquid, but most retirement savings isn’t.

Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.

The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.

2) There are too many competing priorities.

Millennials are dropped into the middle of a financial should-fest. You should pay down school loans, save up for a home down-payment, drive a cheap ride, purchase the proper level of insurance, enhance your credit and save three months’ worth of cash in emergency reserves. All while having a life? No chance.

Most personal finance instruction tells you what your priorities should be, and if you’re looking for that kind of direction, I’m happy to help in that regard as well. But it’s also not a mortal money sin to employ some Solomonic wisdom and compromise between, say, two worthy savings initiatives—like short-term emergency reserves and long-term retirement savings. Therefore, while I can’t go so far as to suggest that you bag the idea of building up cash savings in lieu of a Roth, I’m comfortable with you splitting your forces and dipping into your Roth IRA in the case of a true emergency. The challenge we all face is to define “true emergency” without self-deception.  (And no, splurging on concert tickets or a last minute vacation with friends don’t qualify.)

3) Roth contributions cost you less today than they will in the future.

Despite my sincerest attempt, I couldn’t avoid the more technical topic of taxes—and nor should I, in this case. That’s because it only stands to reason that you’re making less money—and therefore paying less in taxes—at the front end of your career than you will be in the future.

Therefore, in addition to beginning tax-free compounding sooner, Roth IRA contributions—which are not tax-deductible—will likely “cost you” less as a career newbie than they will as a seasoned executive. At SpaceX. On the first Mars colony. Furthermore, you can also make too much to contribute to a Roth IRA, progressively phasing out of eligibility at income of $118,000 for an individual and $186,000 for a household.

Like Coachella tickets, the opportunity to invest in a Roth IRA may not be around forever. Tax laws and retirement regulations are constantly evolving, and who knows what the future may hold. This increases their value for everyone, but especially for those who could benefit from them the most—Millennials.

This commentary originally appeared February 22 on

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

photos courtesy of InvestmentZen

Open Wallet

What 2017 May Mean For Your Personal Finances

Re-posted from

By Sarah Skidmore Sell, Associated Press   |  Posted Dec 26th, 2016 @ 8:26am

It’s been a tumultuous 2016 — both financially and politically. The year may have left some people wondering, what’s next? And, how will it affect me?

Lacking a crystal ball, we asked a few economic experts what they think 2017 may hold in store for Americans’ personal finances. Here’s their take on what to expect in the year ahead:

Q. What’s the job market going to look like?

job search

A. “The job market in 2017 will be about as good as it gets,” said Mark Zandi, chief economist at Moody’s Analytics. “There are currently a record number of job openings and layoffs are at record lows.”

Job growth should be strong next year, with more jobs across all pay scales, Zandi said. With the economy at full-employment, pay increases should also be as large as they’ve been in a decade, and well above the rate of inflation.

The only soft spots Zandi sees will be in energy and other commodity-related industries, manufacturing that is sensitive to global trade, and industries being disrupted by technology, such as print media or brick-and-mortar retailing.

“2017 will be a great year if you’re looking for a new job or a better one,” he said.

However, while the job market is good, it’s taking longer than ever to get hired, said Andrew Chamberlain, chief economist at Glassdoor. The interview process now takes 22.9 days on average to complete in the U.S. as employers conduct additional screenings to find the right candidate, Chamberlain noted in a recent report.

Don’t expect jobs to look the same once you land them, either. Chamberlain predicts that automation will change every job. There may also be a shift away from flashy benefits packages in some industries in 2017. In the tech industry particularly, where fun perks are the norm, employers may be looking at which benefits give them the most bang for their buck. He also predicts employers may finally take action to level the gender pay gap, thanks to greater awareness, data availability and pay transparency.

Q. Will gas prices go up?

Gas pump

A. 2017 will likely be another cheap year to fuel your car, but not quite as good as 2016, several energy experts said.

A huge global glut in the oil supply has driven down prices in recent years, meaning consumers pay less at the pump. As of mid-December, gasoline is averaging $2.115 a gallon in the U.S., said Tom Kloza, global head of energy analysis at the Oil Price Information Service. He expects 2016 will be the cheapest year for American motorists since 2004, when the average price was $2.265 a gallon.

But recently OPEC — short for the Organization of the Petroleum Exporting Countries — recently agreed to cut production beginning in January to restore some stability to the market. If the cartel’s members follow through, global oil production will slow, but not by much.

And while there is a likelihood that supply and demand will rebalance in 2017 under the OPEC agreement, Kloza said it’s also possible that various countries will cheat on production pledges. That could mess with oil and gasoline prices. He expects prices will range from $2.10-$2.75 a gallon nationwide over the course of 2017, with seasonal and regional fluctuations.

Patrick DeHaan at said he expects the national yearly average will be 20 to 30 cents a gallon higher than this year. With Americans driving an average of 15,000 miles a year each, using about 600 gallons of gasoline, that means someone driving a normal passenger vehicle will pay about $120 more on gas in 2017 than this year, DeHaan said.

Q. What should I expect from interest rates?

Interest rates

A. The Federal Reserve slightly raised its key interest rate this month and said it may raise rates up to three more times in 2017. But that doesn’t spell disaster for borrowing in the year ahead.

The Fed move will likely lead to higher rates for credit cards, home equity loans and adjustable-rate mortgages first. That means this is the time to pay down high interest rate debt and insulate yourself from variable rate debts, said Greg McBride, chief financial analyst at

Don’t lose sleep over auto loans if you are in need of a new set of wheels, as a rate hike of this size has an inconsequential effect on affordability. And most student loans are federal and charge fixed rates. But if you have private loans, you may want to look at your financing options as these often charge variable rates and may be impacted.

House shopping? That’s a mixed bag — mortgage rates were already volatile before the rate hike and that’s likely to continue. McBride said that even with hikes, mortgage rates will likely stay closer to 4 percent than 5 percent in 2017. That’s still low by historical standards.

Savers may finally begin see some improvement in rates for savings and CDs. But it may take a while for that to play out, McBride warned.

And keep in mind that three potential hikes are just a prediction. This time last year the Fed said it would raise interest rates four times in 2016, but it has done so only once.

“I’ll believe it when I see it,” McBride said.

Q. And what about my taxes, will they really change?

A. There’s potential for some major changes to the tax system next year under president-elect Donald Trump’s proposals.

According to his action plan, Trump will simplify the tax system and lower the tax burden on Americans, primarily the middle class. He aims to reduce the number of tax brackets from seven to three. And he says Americans will be able to deduct their childcare and eldercare expenses from their taxes, among other changes.

The average family could see a 3 to 5 percent reduction in their tax bill under Trump’s proposals, said David Prokupek, CEO of Jackson Hewitt. While these are just proposals, Prokupek suspects they will move forward given their priority in Trump’s agenda and for the Republican-led Congress in place. Even if it takes time, tax law changes such as these are almost always retroactive. So even if it’s passed later in the year, it will apply to all of 2017.

The proposal is not without some controversy, however. An analysis by the nonpartisan Tax Policy Center found that about 8 million families, including a majority of single-parent households, would actually see higher tax bills under Trump’s proposals. But Trump’s advisers deny that he will raise taxes on middle-income Americans and say the president-elect would instruct Congress to avoid such hikes.

As for the taxes you owe or the refund you’re due come April — that falls under existing law.


AP Writer Christopher S. Rugaber contributed to this report

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


Stocks may fare better today than they did . . . .

Stocks may fare better today than they did than they did in the last two elections


Reposted from
As the votes started to swing in Donald Trump’s favor overnight, Dow futures made some pretty stunning moves — at one point plummeting more than 800 points.

The plunge suggested markets had not expected a Trump victory and would be in for a wild ride Wednesday as investors digested the results of the U.S. elections.

Since then, futures narrowed their losses and were down about 286 points, or 1.6 percent.

Still, volatile trading is not unusual the day after an election. While the 2012 presidential race was arguably much less tumultuous, the markets still made some big moves.

Obama’s win in 2012

On Nov. 7, 2012, the Dow shed 312.95, or 2.4 percent, the S&P 500 tumbled 33.86, or 2.4 percent, and Nasdaq slipped 41.71, or 1.4 percent

So, based on where futures were recently, Wednesday could be actually “better” than what occurred in 2012.

Obama’s win in 2008

How about 2008?

That was the election that put Barack Obama into the White House — and it occurred during the midst of the financial crisis. On Nov. 5, 2008, the day after that election, the Dow fell 486.01, or 5.1 percent, while the S&P 500 lost 52.98, or 5.3 percent; and Nasdaq fell 98.48, or 5.5 percent.

Bush’s win over Kerry in 2004

The last day-after-election day to see the stock market rise occurred in 2004, when incumbent President George W. Bush defeated his Democratic rival John Kerry, then a senator from Massachusetts and now U.S. Secretary of State.

Although Bush’s margin of victory in the popular vote was the smallest ever by a re-elected president, the markets looked on the victory favorably. The Dow gained 101.32, or 1.0 percent; the S&P 500 gained 12.55 or 1.1 percent; and Nasdaq added 19.54, or 1.0 percent.

So — today’s markets are currently on pace to perform better than they did in 2012 and 2008.

How Much Investment Risk Can You Stomach?

Originally posted on Tuesday August 4th 2015 10:00 AM ET

How Much Risk Can You Stomach?

Basically, risk tolerance is the measure of how much risk someone can handle as an investor.

Financial advisors say that risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle, explains Manisha Thakor, director of Wealth Strategies for Women at Buckingham and The BAM Alliance.

Risk tolerance often varies with age, income and financial goals. It can be ascertained by many methods, including questionnaires designed to reveal the level at which an individual can invest but still be able to sleep at night, Thakor said.

When it comes to risk tolerance, investors need to ask themselves some tough questions, according to Thakor. For instance: How much money do you have available? And how much of it can you afford to lose?

Read More Hedge tactics every investor should know

Thakor said investors also need to look at their financial time frame. The length of time remaining until you reach your goal matters when it comes to how much risk you can handle in your portfolio. For example, as investors approach retirement, they will have a lower risk tolerance, since they don’t have decades to rebuild if a riskier investment causes problems.

Additionally, emotions come into play when you are talking risk tolerance, she said. If risky investments are going to stress you out to the point that it affects you in other areas of your life, that can be an issue. It also matters if you are so risk-averse that you never include investments that can potentially grow your wealth.

Formulating a Plan

Legends Jack Bogle and Burt Malkiel agree on what investors shouldn’t do right now By Melody Hahm

Originally posted on

UK voters shocked everybody Thursday by voting to break free of the EU, and hedge funds and day traders may jump on the opportunity to buy on the Brexit dip. But average investors might not want to make hasty decisions based on the Brexit vote. Or any decisions at all.

“This is not 2008 and the worst thing investors can do is to panic and sell out,” says economist Burt Malkiel, author of the classic finance book “A Random Walk Down Wall Street.”

Meanwhile, famed investor Jack Bogle echoed that statement with this advice: “Don’t do something. Just stand there. Don’t be distracted by market opinions, stampedes and foolishness. So do nothing.”

Bogle says it’s vital to remember that if you got out during the depth of the 2008-2009 market collapse after the subprime meltdown or even after 9/11, you would have missed out on the huge market gains over the past few years.

“If someone tells you to get out of the market, before you do, remind them to tell you get back in,” Bogle says.

On Friday morning, Bogle’s Vanguard Group sent a note to clients emphasizing that “it may take several years for the specifics of Brexit to play out.” The best way for investors to protect themselves against the market uncertainty is to hold a diversified portfolio, the note said.

Specifically, when it comes to the anxiety surrounding your 401(k), the best course of action may be to take no action at all.  “Don’t be too aggressive. Balance, balance, balance,” says Bogle. “Stay balanced and with your 401(k). If this the first day you have it, do it now!”   . . . .  .  .  .  .  .  .

“The main point of investing in a long-term, diversified portfolio of index funds is to pull yourself out of the day-to-day tracking of the market that consistently leads a vast majority of investors, including professionals, to underperform over the long-term,” says Malkiel, the chief investment officer of robo-advisor Wealthfront, which has over $3 billion in assets under management.

He added: “Wealthfront makes sure [investors] understand that markets go up and markets go down and you cannot predict these movements.”

David Joy, Ameriprise’s chief market strategist, says …“If you’re a longer term investor I don’t think you have to do anything, at least right now. You also run the risk of making some irrational decisions if you move immediately after, or two or three days after,” Joy said. “A lot of trading that takes place day to day is really tactical, algorithm driven trading. You don’t want to get in the way of that and it might not be reflective of the underlying value of the assets.”

Amid this global market turmoil, the only logical thing to do right now may be to Keep Calm and Carry On.

4-benefits of holding stocks for the long-term

4 Benefits of Holding Stocks for the Long Term By David Dierking

Originally posted on

Many market experts suggest holding
stocks for the long term. The Standard &
Poor’s (S&P) 500 Index has experienced
losses in 10 of the 40 years from 1975 to
2015, making stock market returns quite
volatile in shorter time frames. However,
investors have historically experienced a
much higher rate of success over the
longer term.

In an ultra-low interest rate environment,
investors may be tempted to dabble in stocks to boost short-term returns, but it makes more
sense to hold on to stocks for the long term.

Better Long-Term Returns

An examination of several decades of historical asset class returns shows that stocks have
outperformed most other asset classes. Using the 87-year period from 1928 to 2015, the S&P
500 has returned an average of 9.5% per year. This compares favorably to the 3.5% return of
three-month Treasury bills and the 5% return of 10-year Treasury notes.
While the stock market has outperformed other types of securities, riskier equity classes have
historically delivered higher returns than their more conservative counterparts. Emerging
markets have some of the highest return potential in the equity markets, but also carry the
highest degree of risk. Short-term fluctuations can be significant, but this class has historically
earned 12 to 13% average annual returns.

Small caps have also delivered above-average returns. Conversely, large-cap stocks have
been on the lower end of returns, averaging roughly 9% per year.

Opportunity to Ride Out Highs and Lows

Stocks are considered to be long-term investments. This is partially because it’s not unusual
for stocks to drop 10 to 20% or more in value over a shorter period of time. Over a period of
many years or even decades, investors have the opportunity to ride out some of these highs
and lows to generate a better long-term return.

Looking back at stock market returns since the 1920s, individuals have never lost money
investing in the S&P 500 for a 20-year time period. Even considering setbacks like the
Great Depression, Black Monday, the tech bubble and the financial crisis, investors would
have experienced gains had they made an investment in the S&P 500 and held it
uninterrupted for 20 years. While past results are no guarantee of future returns, it does
suggest that long-term investing in stocks generally yields positive results, if given enough

Investors Are Poor Market Timers

One of the inherent flaws in investor behavior is the tendency to be emotional. Many
individuals claim to be long-term investors up until the stock market begins falling, which is
when they tend to withdraw money for fear of additional losses. Many of these same investors
fail to be invested in stocks when a rebound occurs, and jump back in only when most of the
gains have already been achieved. This type of “buy high, sell low” behavior tends to cripple
investor returns.

According to Dalbar’s 2015 Quantitative Analysis of Investor Behavior study, the S&P 500 had
an average annual return of roughly 10% during the 20-year period ending Dec. 31, 2014.
During the same time frame, the average investor experienced an average annual return of
just 2.5%. Investors who pay too much attention to the stock market tend to handicap their
chances of success by trying to time the market too frequently. A simple long-term buy-andhold
strategy would have yielded far better results.

Lower Capital Gains Tax Rate

An investor who sells a security within one calendar year of buying it gets any gains taxed as
ordinary income. Depending on the individual’s adjusted gross income, this tax rate could be
as high as 39.6%. Those securities sold that have been held for longer than one year see any
gains taxed at a maximum rate of just 20%. Investors in lower tax brackets may even qualify
for a 0% long-term capital gains tax rate.