Why You're 45% Poorer and What You Can Do About It
How bad was the damage? According to Bloomberg, here are the major hits to household net worth -- assets minus debts -- during the recession, which officially ran from December 2007 to June 2009:
- The median family's net worth fell 23.2% from $125,000 to $96,000;
- The S&P 500 fell 57%;
- The S&P/Case-Shiller index of housing prices in 20 cities dropped 32%.
Net worth declines are particularly painful for those expecting big bills -- like a $52,000-a-year college tuition or paying for retirement. And with such a big drop in net worth, the urgency of regaining lost ground could hardly be greater.
What Can You Do About It?
My best advice is to buy stocks. That's because of stunning corporate health. In 2010, profits hit a record $1.66 trillion. And 2011 revenue growth prospects of 7% for the S&P 500, with near-record 19.8% operating margins, bode well forearnings potential. All this profit growth has not yet been factored into stock valuations, which currently trade at a P/E of around 15 -- far below the P/E of 19.7 typical of previous bull markets.
Moreover, with the possibility that the Fed could raise interest rates to control inflation -- which it may do if wages start to rise -- bonds are a bubble poised to pop. When interest rates go up, bond prices drop.
I find the most efficient strategy for investing in stocks is to buy an S&P 500 stock index fund that has a low expense ratio. Since few mutual funds can regularly beat the market averages, you have a pretty good chance of keeping up with the 26.5% average annual rise in stock prices we've enjoyed since January 2009.