RE: Discussion Questions

[Michael Jones <powderfinger99@yahoo.com>]

<<<<
First, "What if we had another Great Depression or at least another 
rotten period like we had in the 1970s.  Wouldn't a system of personal 
accounts collapse?  How can you guarantee people that they won't end 
up with nothing?"
>>>>

Defined contribution plans (401K's) were enacted into law in 1978. 
Since that time the country has experienced many recessions, and
one stock market crash larger (percentage-wise) than the 1929 
crash: Oct. 1987. And yet the stock market and these plans all
survived.

It takes a while to understand that stock market downturns are
a healthy part of our economic system. The trick to achieve
gains in the stock market is to dollar cost average your 
investment (put money in periodically) over a long period of
time. If you were enrolled in a 401K during 1987, your long term
return was significantly enhanced by buying during the market
downturn of 1987. The key was to buy and hold.

I calculated the return that my own investments have returned
since I started in 1993. The total return for my 401K has been
about 150%. The return includes all the contributions, including
the contribution I made last month.

Even though I have been enrolled in the plan for a little over
5 years, a market downturn similar to the one experienced in 1987
would still leave my portfolio up over 100%. In order for my
investments to actually lose money, the stock market would have
to crash over 75%, which has never happened before. 

If I compare my return so far in my 401K to that I would expect
from SS, the SS account can be expected to return less than
the original amount of contributions. In other words, the same
401K money invested in Social Security is like a stock market
crash of over 75%, since I will never be able to get back 
principal!

Perhaps the past couple of years were an aberation since the
stock market returns were quite good. Even so, the long term
stock market return has been over 7%/year. A rate of return
of 7% corresponds to a 100% return every 10 years. (The return
over the past 5 years works out to be about 20%/year).
If did not contribute anymore money to the 401K, I can 
expect an overall return of 1700% in 30 years, assuming just
the average rate of return for the stock market. If in 30 years,
the stock market crashed 30%, the overall return would still
be over 1100% (11 TIMES the principal!). Under Social Security,
the return will be less than (1) TIMES principal!

I would welcome another major stock market downturn. Since I
have over 30 years left to invest, the downturn would offer me
an opportunity to increase my long term return by buying in
low.

Michael