Something to Chew on Part 2

(Note: Our “comments” button is acting up again, so I apologize to those who tried to send in a response to Wednesday’s questions and couldn’t get through. It’s supposed to be fixed soon. All I can say is please try again sometime.)

Wednesday’s scenario: You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, of course, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.

Wednesday’s first question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?

The answer: Mathematically, it doesn’t matter. To illustrate the extremes, if the loss were to occur in the first year, the calculation would be $10,000 times 0.70 (to reflect the 30% first year loss) times 1.08 (to book the second year’s return) times 1.08 (to book the third year’s return) etc., continuing 34 times. The formula would be:
($10,000)(0.70)(1.08 to the 34th power)

If, instead, the loss occurred in the last year, the formula would be:
($10,000)(1.08 to the 34th power 34)(0.70)

We all know that A x B x C is the same as A x C x B, right? So, either way, you’ll end up with the same amount – that $10,000 investment will have grown to $95,831.

This is also true, of course, with any subsequent retirement investments. If you invest $15,000 a few months later and it has some good return years and some bad loss years, the sequence of gains and losses again won’t matter – it won’t have any effect on the ending value of this investment. So, this leads us to . . .

Wednesday’s second question: In your actual retirement investing (that’s you, for real), do you care when the inevitable losses come – before, at, or even after your retirement?

Ponder that a bit (if you’re so inclined). If you have some thoughts, please try sending in a comment (if you’re not too frustrated from prior unsuccessful attempts). I’ll give you my views on this next week.

Enjoy the weekend!