Watching the debate on Social Security Reform on the Senate floor on Tuesday, I was dumbfounded by Sen. Rick Sanatorium continuous assertions that Private accounts for Social Security will eliminate risk for the retiree. Last time I checked, investing in the stock market was NOT risk free. In fact today in USA Today I read this article entitled
Top-selling funds of 2000 deep in red. Check out some excerpts on the flip.
The first excerpt that hit me in the forehead was this one.
The average stock fund has eked out a 1% gain the past five years. But investors who poured money into the 50 hottest-selling funds five years ago are down an average 42% since March 2000, according to Lipper, the mutual fund trackers.
These aren't just a bunch of tiny Internet funds. Consider Fidelity Aggressive Growth, which had $23 billion in assets in March 2000. Investors poured $15.1 billion into the fund the 12 months before the S&P 500 peaked that month. A $10,000 investment then would be worth $2,697 now -- a 73% loss.
And then you read the scarey stuff.
Although most funds encourage investors to hang in for the long term, long-suffering investors in some funds will have a long time to wait. An investor who bought Fidelity Aggressive Growth in March 2000, for example, will have to gain 271% just to break even.
The 50 largest funds five years ago also have suffered above-average losses since 2000: They're down an average 15%. Fidelity Magellan, then the largest fund, has fallen 23%. Janus, then fourth-largest, is down 45%.
Investors who fled laggard funds have reason to kick themselves, too. The 50 funds that saw the most money flee in the 12 months ending March 2000 have gained an average 21.4%.
So in recent history the average Joe who invested in the stock market has seen significant losses.
What does this have to do with private accounts? Well if you understand how the benefit offset function will work in private accounts, see my diary entry Social Security Reform - The Unoffical Truth for more information, then you will understand that any loss to your private account value could have a huge effect on the amount of money you will receive during retirement if you can not overcome that loss. Basically if your private account value at retirement is not greater than or equal to the Notational Benefit Offset Value of your Private account you lose for the rest of your life. The Notational Benefit Offset Value of your Private account increases each year at the rate of inflation plus 2%. So this value will in all likelyhood never suffer a loss.