Nothing's going right for mainstream America lately. Average home prices fell 5.3% in the year that ended in July, according to numbers from the Office of Federal Housing Enterprise Oversight. In 20 select metropolitan areas, prices fell 17.5% over the same period, as measured by the S&P Case-Shiller Index. Ouch.
Of course, that's nothing next to the stock market. As I type this, the S&P 500 is down some 35% year to date, and almost 40% over the past year. And look at this:
|
Company |
1-Year Return |
|---|---|
|
General Electric |
(49%) |
|
Yahoo! |
(55%) |
|
Chesapeake Energy |
(51%) |
|
Eli Lilly |
(37%) |
|
Starbucks |
(60%) |
|
Wendy's/Arby's |
(72%) |
|
eBay |
(63%) |
Data from Yahoo! Finance.
If you own some of these companies, don't despair. Things aren't necessarily that bad. (And don't start coming at me with a club in your hand. I own a few of these stocks, myself!)
It's true that a portfolio like the one above that was once worth $100,000 might now be worth less than $50,000, and that's far from inconsequential. But here's the thing: For most of us, today's prices don't matter so much, because we're not planning to sell the stocks anytime soon.
If you're 50 years old, and you plan to retire at 65, you still have 15 more years of working, saving, and investing. Even at 65, you won't be cashing in your entire portfolio, because you may well have another 30 years to live off of it, until age 95. If so, much of your current stock has at least 15 to 20 years left to grow for you, and some of it has 30 or more years.
What really matters is your ultimate gain or loss. And to calculate that, all you really need is the price at which you bought, and the price at which you sold -- two prices, from two days, out of hundreds or thousands of days. All the intervening prices don't really matter so much. Sure, I bought GE stock at around $37 per share, and I'm down a whopping 49% on it. But I hope to own it for a long time, and if it's at $120 in 15 years, I'll have made an annual average gain of 8%, or a total of 225%. I won't have a 49% loss forever.
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