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How Much Could Your Stocks Lose in Another Tech Crash?

Camarda Wealth Advisory Group

Does your investment portfolio have more tech than you think?

Increasingly, tech drives the world, and no, that’s not a Tesla joke! And there’s no mistaking that as the economy becomes more tech-centric, the stock market becomes increasingly dominated by the tech companies that drive economic activity.

By some estimates, the S&P 500’s allocation to tech is approaching 50% in terms of total value exposure, and this trend of increasing tech will probably continue. What could that mean for your portfolio?

What could you lose in another tech crash?

The Y2K crash that began in 2000 is probably the best known tech-related meltdown, when the dot com bubble that burst in 2003. Back then, tech stocks – NASDAQ – were a distinct separate slice of the markets, but now they are so intertwined you may be at more risk than you think. 

The Y2K plunge erased nearly 80% of market value, and did not break even for some 15 years – and required a whopping 355% gain to merely break even.

Consider: What could a fifteen-year nosedive in the value of your investments do if you are in or approaching retirement? At the same time taxes are gobbling ever-great shares of your incredibly shrinking inflated dollars? 

Let’s run the numbers

 

Let’s look at some simple math that maybe your advisor has not shared with you. Say the market tumbles 80% or so like it did in the last tech crash. That would take a respectable $2M nest egg down to $400K – ouch!           

And if you are pulling money and spending – like out of an IRA – that’s before we look at taxes and inflation.

So if your nestegg tracks the last 16-year climb from tech crash to breakeven, your nominal return – before inflation and taxes – would be about 10.6% a year. Sounds good until you remember you’re digging out from an 80% loss!

If we adjust for not the mega-inflation I fear but just a prudent risk-management assumption of 5% annualized, the actual return – before taxes! – is about 5.5%.

If we then take that nestegg with that real return and assume you pay today’s highest income tax rate of 37% – which is before any state income tax and I think much lower than future rates on “fat cats” like those interested in reading this article – we get some ugly news.

If someone did that at 65, and say, lived to 85, and spent both return and principal, leaving nothing for the kids or even a surviving spouse, here’s what the annual spendable today’s dollars income “pension” number would look like:

  • $31,726 before taxes
  • $19,987 after taxes

Jiminy Cricket, that’s scary!

I bet even five times that amount would leave you scrimping!

Surely, I hope that I am wrong. And I may have exaggerated and simplified more than a bit to get your attention.

But in all my decades studying and practicing wealth management, I have never, ever seen the sky so dark. What to do?

Check out my ideas in my follow up post, Strategies to Protect & Grow Wealth Mid-21st Century.

IMPORTANT  BLOG DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Camarda Wealth Advisory Group -“CWAG”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from CWAG.  Please remember that if you are a CWAG client, it remains your responsibility to advise CWAG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. CWAG is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of CWAG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: CWAG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to CWAG’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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