The 4% safe withdrawal rule is not really a rule, but a general guideline that will result in a retiree’s portfolio outlasting their lifespan, most of the time. This should be true even for an early retiree that has achieved financial independence at a young age, because 4% is usually small enough to mitigate sequence risk, which is the danger that the market will decline soon after you retire. In most scenarios based on historical data, a balanced or aggressive portfolio will grow in perpetuity by withdrawing 4% of the initial balance per year.

The 4% rule does not mean you withdraw 4% of the present balance each year, but rather the initial balance. Typically, an inflation adjustment is included. If you retire with a $1,000,000 portfolio (for example, 80% stocks and 20% bonds), you would withdraw $40,000 in the first year, and if inflation is 2%, $40,800 in the second year, $41,616 in the third year, and so on. If you retired at the start of 2017, in 2017 your portfolio would probably have increased to about $1,175,000, but you would still withdraw $40,000 in the second year (or $40,800 with 2% inflation), not $47,000. You would withdraw the same amount even if it was a bad year for equities and generally, your portfolio would still eventually recover (rather than going to zero).

Historically, there are years where the 4% rule would not have performed well. Most recently, in 2000, but infamously in 1929 as well. The Great Depression was somewhere around an 80–90% decline, so if you retired right before the crash and then withdrew 4% of the initial balance the next year, that would be 20–40% of the decimated balance, leading quite quickly to running out of money. If you were lucky enough to retire in 2009, you saw immense capital gains in the following decade which has resulted in a much higher portfolio value even with annual 4% withdrawals. To account for potential market crashes, some have suggested changing the 4% rule to 3%. Of course, this is even more likely to leave huge amounts of money on the table when you die, which could be left to heirs or charity. Alternately, you could purchase a single premium immediate annuity from an insurance company, using a lump sum from your portfolio. Then, the insurance company will pay a fixed or inflation-adjusted monthly payment for the remainder of your life (“guaranteed income”). Of course, all insurance products have negative expected return, and their purpose is to protect against unlikely but disastrous outcomes. But, one can retire safely with a smaller nest egg when purchasing an annuity as compared with continuing to invest in securities.

If you are receiving other income, such as a pension or Social Security benefits, you can add these to the 4% rule when considering whether you have enough to retire. If your pension and Social Security give you $30,000 per year, but you need $40,000 to live on, then 4% of your portfolio only needs to amount to $10,000, which indicates an initial portfolio value of $250,000.

Vanguard has a piece from August 2012 on the 4% rule, which misses the point in a spectacular fashion. Vanguard complains about declining dividend yields from stocks and interest yields from bonds. Indeed, the average cap-weighted dividend in the U.S. stock market is presently only 1.87%, which is much less than 4%. But, issuing dividends is a boneheaded way for corporations to use excess capital, and in fact, income from interest and dividends is inferior to capital gains from appreciation in share price. A dividend compels you to take income on the corporation’s schedule, but you could simply sell a portion of your equity stake to receive income on your terms. Warren Buffett knows this well, which is why Berkshire Hathaway famously does not issue a dividend. This has fueled a meteoric rise in its Class A share price ($305,505 per share as of this writing) which otherwise would have been attenuated by the issuance of dividends.

Like most market forecasts, the Vanguard report takes part in a practice no better than fortune telling or astrology: predicting future market performance. Vanguard predicted quite pessimistic returns in August 2012… since then, the S&P 500 has doubled. Of course, it could drop by half in the near or distance future, but good luck figuring out when that will happen. Investing for the long haul is far better than trying to predict market returns.

As for timing withdrawals from your portfolio, because the duration you are invested in the market generally correlates positively with returns, anything that increases the duration you are invested is worthwhile. So, rather than taking your annual 4% withdrawal as a lump sum at the start of the year, monthly distributions are preferable, or even weekly if you can do it without fees or penalties. This is the same concept, in reverse, as to why paying a mortgage biweekly results in slightly less interest paid over the life of the mortgage than paying monthly.

Timing of withdrawals should also consider your tax situation. Because income taxes are assessed based on annual income, if you have less income in a certain year you might withdraw more to enjoy a lower tax rate on the realized income. If you need additional money during a year in which your income is already high, you could withdraw from your Roth accounts, but if your income is low, withdrawing from pre-tax retirement accounts or taxable brokerage accounts is more sensible.

In summary, remember that the 4% rule is in relation to the starting balance of the portfolio. This is related to the idea of declining risk with many decades of being invested in the S&P 500, whole U.S. stock market, or whole global stock market. The risk of loss approaches 0% with a longer duration of investment in relation to the initial balance, not the current balance. Consider two people: one invested $1 million in the S&P 500 on September 20, 2018, and another had $1 million in the S&P 500 as of September 20, 2018 that had been invested for 30 years. Both still wound up with a balance of about $800,000 on December 24, 2018, but the latter person still had much more money compared with their initial investment in 1988, even adjusting for inflation.

The 4% rule is an attempt to mitigate both sequence-of-returns risk and longevity risk. Sequence risk is the risk that you retire right before the market crashes, which could put you in the poorhouse. Usually, withdrawing 4% of the initial balance each year is sufficiently low to leave enough money in the portfolio for it to recover, despite the poor performance early in your retirement (although it is always better to withdraw less in such a scenario, if you can manage to do so). Longevity risk is the risk that you outlive your money, and the 4% rule mitigates this by leading you to dying with much more money than you started with when you retired, in most scenarios. Predicting one’s death is risky business… you can’t just look at life expectancy because that’s a median, which means 50% of people live longer than life expectancy. If you time your spending to run out of money right at 79, you might end up living to 99 but you will be destitute for those last 20 years. No one wants that.

No one knew better than Jack Bogle (1929–2019) that the interests of the financial industry are diametrically opposed to the interests of the common person. Low-cost index-tracking funds now comprise about 20% of the market for U.S. stock mutual funds, and this share continues to grow. However, Americans’ financial and investing literacy remains low, and those seeking out information are overwhelmed by propaganda from profiteers, which makes it hard to discern the truth.

John Paulson, a wealthy profiteer in the hedge fund industry, surprisingly shared some truth in a recent Bloomberg Opinion column:

“The other thing I love about this business, when I say why I went into this business, is the fee structure,” he [Paulson] added, detailing how much he could make in charging a 1 per cent management fee and 20 per cent performance fee on different levels of assets.

“The more money you manage, the greater the fees,” he said. “Now ultimately we managed over $30bn, and there were years our returns were well in excess of 20 per cent, so to get to those levels, the fees just pour out of the sky.”

The column author (Matt Levine) continues, elaborating on how Paulson profited even while screwing over his investors:

Also if you start losing money you don’t have to give the fees back: “The 63-year-old money manager said that almost 75 to 80 per cent of the money managed by Paulson & Co was now his own capital, reflecting years of disappointing returns that have driven outside investors away”—though also reflecting earlier years of huge returns and huge fees that allowed him to have billions of dollars of his own money in his fund—and “he would consider turning his firm Paulson & Co into a family office ‘in the next year or two.'”

Hedge funds aren’t even open to the ordinary investor; you must be an accredited investor with at least a $1 million net worth excluding one’s home, or income over $200,000 in the past few years. Supposedly, hedge funds are where “smart money” goes; accredited investors are sometimes referred to as “sophisticated” investors, such as in Australian law. This is ironic, because it is foolish to pay 1% per year of portfolio value plus 20% of gains, when active investors are demonstrably incompetent. Above, we see that Paulson had a few good years early on causing foolish investors to pour into his fund, followed by many years of terrible returns that led them to pull out. All along, he collected about 1% per year in management fees plus about 20% of investors’ gains during good years, while losing nothing in bad years. This is highway robbery.

Vanguard, the company Jack Bogle founded, fought profiteering on multiple fronts. They fought against “load fees,” which are sales commissions for stockbrokers that come as a percentage of invested assets. Up until the 1970s, no-load mutual funds were almost unheard of, and it was common for brokers to get as much as 5% right off the top—if you put in $10,000, only $9,500 got invested and they kept $500, immediately kneecapping your returns. Now, investments with load fees are the abnormality. And, although Vanguard has always offered actively managed funds, they pioneered index-tracking funds with much lower fees. Tracking an index, such as the S&P 500, has shown to be consistently better than active management. Most fund managers produce returns that are lower than an index fund. When you add sky-high fees on top of this, you are guaranteed to lose money. Conway (2014) writes in a Barron’s article:

How hard it is to predict who will do well. This isn’t part of the latest S&P study, but the index maker’s previous work on the subject suggests there’s no statistically significant persistence among funds in the highest-performing groups. There’s no new evidence suggesting that’s changed.

When you look at your 401(k) plan, you will almost certainly see investment options that don’t belong there. There are almost assuredly funds in there that charge fees of 1% per year or more, and sometimes a low-cost index fund, with an annual fee of about 0.05%, isn’t even available. The profiteers’ reach is deep, and it extends even to our teachers who are scammed by 403(b) annuity plans, in cahoots with lawmakers and administrators who partner with profiteering companies to only put bad investment options on the table.

Online, the propaganda against low-cost investing is widespread. The industry reaps massive profits while creating little value, not unlike the tobacco companies. They have a lot to lose. This is why there are daily propoganda pieces in the news saying things like “if everyone invested in index funds, it would be a catastrophe” and stuffing Wikipedia pages with propaganda such as “many investors also find it difficult to beat the performance of the S&P 500 Index due to their lack of experience/skill in investing” and purporting that unsuccessful active managers are actually “closet indexers,” justifying high fees while failing to deliver the product (active management) that purportedly produces profits.

In truth, active management is a nothingburger. You pay high fees and get lower returns than an index fund. It’s sort of like going to a bank and paying $200 to arrange to be mugged in the parking lot.

Even without sales commissions, financial advisors and other financial professionals still have plenty of ways to profiteer. They do this via an annual or quarterly fee assessed against “assets under management” that you have made them custodian of, which is usually around 1% per year. Framing this as 1% per year actually does a disservice to the investor, however. The stock market only returns about 10% per year as a long-term average, before inflation which is roughly 3%. One percent of 10% is actually a 10% fee, and if adjusting for inflation, a 14% fee. Would you pay a real estate agent 14%?

On top of this, the investments financial advisors place you in, even if index funds, likely do not have the 0.05% or even lower annual fees that are offered by Vanguard, Fidelity, Charles Schwab, and others. You might see your money in a fund that is substantially similar yet has a 0.5% annual fee, with your advisor receiving a cut from the affiliated company. If you can expect a long-term average of 7% in real returns before fees, then 1.5% of fund and advisor fees gobbles up 21.4% of these returns. Each and every year.

The FINRA foundation’s recent study of Millennial investors found that Millennials are actually eager to work face-to-face with financial professionals rather than do-it-yourself investing or using a robo-advisor. Also, Millennials had no idea that you need substantial assets to work with a financial advisor, and they expected an advisor to take a whopping 5% of assets under management as a fee each year. Such lack of knowledge is kryptonite to achieving financial independence. Even a high income cannot compensate. “A fool and his money are soon parted,” as the saying goes. In this industry, it is not helpful that wolves masquerade as sheep and sheep do not even notice they are being eaten.

The common American does not have access to a hedge fund or even a financial advisor, yet they still have a 401(k) plan available, chock full of bad investment options. There might only be one low-cost index fund available in their 401(k) fund menu, or even none at all. About half of Americans do not invest in stocks at all, and if they do, they don’t know that buying and holding the whole market is the best strategy. This fact is both counterintuitive and pilloried by propagandists in the financial media. To combat profiteering and propaganda by vested interests in the financial industry, financial education is key, but must be coupled with outlawing and derriding profiteering practices. A good place to start is with 403(b) plans for public school teachers. Teachers lack financial knowledge, shape the next generation’s knowledge, and are besieged with low pay, awful pension plans that no one ever gets a pension from, cringeworthy annuities masquerading as investment options, and sales representatives that stake out school cafeterias to cajole them into financial ruination. Therefore, for my forthcoming Education Ph.D. dissertation at University of Central Florida, An Investigation of Investing and Retirement Knowledge Among Preservice Teachers, I am surveying the next generation of teachers to provide (a) evidence to support reforms both nationally and locally and (b) instructional design recommendations for financial education programs.

Tippy sleeping

Like Tippy, pictured above, most people would sooner fall asleep than read about different types of retirement accounts. However, they are vital to well-funded retirement and can save you money, too.

The individual retirement arrangement (IRA) is an account you set up on your own at a brokerage such as Vanguard, Fidelity, or Schwab, or at a bank such as Ally. Any American with earned income can contribute to one (even minors), and one can have both an IRA and a 401(k). The investment options are wide open; your choices range from investing in an index-tracking mutual fund of the whole U.S. stock market, as I recommend on this website, or something as safe as certificates of deposit (CDs), which presently pay 2–3% each year without risk of losing money.

IRA contributions come out of your bank account without involvement of your employer. Like 401(k)s, IRAs function as commitment devices, penalizing you for withdrawing money before Age 59 and 1/2. Like 401(k)s, they also offer tax benefits, although a key difference is that with IRAs, these benefits are restricted to people earning under approximately $125,000 per year.

In contrast to IRAs, 401(k)s are employer-sponsored. Your employer offers instructions on how to set up an account (perhaps on their website, Intranet, or at the HR department). The investing options are more restrictive than with IRAs, although usually there is at least a low-cost S&P 500 index fund available. You might be compelled to use a particular brokerage, such as Fidelity or Prudential. With 401(k)s, you must direct your employer to take money out of each paycheck to contribute.

The key benefit of a 401(k) is an employer matching contribution. About 4 in 5 employers offer to match a portion of employee contributions, which is free money. For example, some employers will match up to 100% of up to 5% of each paycheck. If your gross wages are $2,000 every two weeks, this means if you contribute 5%, or $100 of each paycheck to your 401(k), your employer contributes $100 per paycheck as well. This is like giving yourself an instant raise. Even if you have credit card debt to pay off, an employer 401(k) match should be prioritized first.

For teachers and certain other nonprofit employees, the 403(b) replaces the 401(k) but is basically the same. The Thrift Savings Plan for federal employees also functions similarly.

IRAs and 401(k)s are both offered as “traditional” and Roth versions which is the difference between being taxed when withdrawing the money in retirement (“traditional” version), or now, in the current tax year (Roth version). Generally, Roth contributions are preferable if you are in a low tax bracket now, because income tax works on a year-to-year rather than cumulative basis.

With 401(k)s, it is still somewhat rare for employers to offer the Roth option. Traditional contributions are useful if your income is a bit higher, both for lowering taxes and for lowering your income to qualify for child tax credits, Health Insurance Marketplace subsidies, et cetera.

Retirement contributions offer another tax benefit: you may also qualify for the Retirement Savings Contributions Credit, which can be worth over $1,000. Unlike with most 401(k) plans, you can make an IRA contribution for the 2018 tax year up until April 15, 2019. However, you should make 2018 contributions to your IRA before filing your 2018 tax return; otherwise you would need to file a superseding or amended return to claim the saver’s credit, and income deduction if making a traditional (not Roth) contribution. When contributing, banks and brokerages will ask you whether you want to designate the contribution for tax year 2018 or 2019.

Many people do not know that you can make contributions to both 401(k)s and IRAs, up to the maximum for each. In 2018, this was $18,500 for 401(k)s and $5,500 for IRAs ($24,000 total), and in 2019, the limits increase to $19,000 for 401(k)s and $6,000 for IRAs ($25,000 total). The vast majority of Americans never get close to either of these limits. Who has $6,000, let alone $25,000, of income to give up in a year? Surveys show about 40% of Americans are hard-pressed to even come up with $400 in a pinch.

Because most people will not approach the limits for either type of retirement account, it is generally fine to have only an IRA if your employer does not offer a match, or to have a 401(k) to contribute only up to the match and then put additional contributions, if any, in an IRA. Americans switch jobs often, particularly among emerging adults, and the plan rules vary widely between employers and 401(k) providers, which makes managing or rolling over orphaned 401(k)s a nightmare.

I have previously characterized retirement contributions as buckets like below, encouraging readers to max out their contributions for each year:

Full retirement buckets

Although this is the fastest path to financial independence, almost no one has the disposable income to do this. Consequently, I recommend paying high-interest debt such as credit cards, private student loans, and unfavorable auto loans before contributing to an IRA. If you have a 401(k) employer match available, this should take priority over high-interest debt, but beyond this, the math favors paying high-interest debt now and increasing retirement contributions later. Full buckets, as pictured above, are unlikely to be a problem.

One of the main goals of my writing is to share and discuss the preparations necessary to be a successful investor—knowledge, emotion, psychology, arithmetic, and more. There will be years like 2002, 2008, and 2018 where you lose tons of money, but on balance, many other profitable years make investing worthwhile over multiple decades. With retirement accounts, it is easier to envision being invested for the long-term because there are penalties for withdrawing money before Age 59.5. In addition, retirement accounts offer tax benefits now, which can make it easier to save or invest for retirement.

You can contribute to an IRA while putting your money in a CD, a completely safe investment with no risk of loss. Some 401(k) plans may also offer safe investments such as U.S. government debt. Within your IRA and 401(k), you are free to move money around between investments at a later time. Therefore, you can start contributing to retirement accounts now, while making risky investments in stocks later, when you are ready—or never.

The retirement accounts established by U.S. lawmakers are labyrinthine and unfortunate. There are many bizarre phenomenon, such as being able to withdraw Roth contributions early without penalty but not traditional contributions, being able to withdraw from your last employer’s 401(k) without penalty if quitting after Age 55 but not from an IRA until Age 59.5, and illogical rules that change year-to-year regarding contribution thresholds and limits. Although you could restrict yourself to taxable brokerage and savings accounts, you must participate in the labyrinth to reap the tax benefits enshrined in U.S. laws and the tax code. Although politicians pretend that retirement accounts benefit the middle class, in practice they benefit the wealthy. Half of Americans do not even have stock investments, which are likely to grow the most over decades (compared with savings accounts, CDs, bonds, etc.) and make the tax advantages of retirement accounts especially profitable. This is one item I and others hope to change through financial education.

Decisions and outcomes are not necessarily related. One can make a good decision that results in a bad outcome, but this does not mean the decision itself was bad. This can be represented by a simple table:

Good OutcomeBad Outcome
Good Decision
Bad Decision

Here are a few examples that come to mind:

Good OutcomeBad Outcome
Good DecisionEating a salad and not getting sick
Planning for retirement and being able to retiring early
Eating a salad contaminated with E. coli
Investing a lump sum in an index fund on the Friday before Black Monday

Bad DecisionBuying a lotto ticket and winning big
Driving drunk without incident
Speculating in BitCoin and losing
Driving drunk and causing an accident

We know that investing a lump sum now is better than dollar-cost averaging your way into stocks or timing the market by attempting to “buy the dip” (e.g., Williams & Bacon, 1993; Panyagometh & Zhu, 2016). Although lump-sum investing is the preferable decision, there is a nontrivial probability of an inferior outcome as compared to investing at a later time. If a bad outcome occurs, it is more salient than had a good outcome of equal magnitude occurred. However, this should basically be chalked up to bad luck. A bad outcome does not mean a bad decision was made.

Separating decisions from outcomes goes against our nature. It is contrary to human psychology. In her 2018 book, Thinking in Bets, poker champion Annie Duke calls the human prediction to judge decisions by the resultant outcomes “resulting.” Resulting is akin to confusing causation for correlation in science.

Making a bet where the odds are in your favor is a good decision, even if you lose. With more and more such bets, a result commensurate with the prudence of the decision approaches inevitability. In the stock market, you can think of each trading day as a bet, with these bets stacking up over time. Below, probabilities from Bloomberg data, compiled by Vanguard, show the probability of positive returns for S&P 500 investment time frames within the selected dates (1/04/1988 to 2/16/2018).

S&P 500 investment during 1/04/1988–2/16/2018Probability of positive return
One day.54
One week.58
One month.64
One year.83
Ten years.91

Although start and end points matter, the pattern has been shown to hold even over the duration of the stock market’s history, including the Great Depression. Above, we see the probabilities of positive returns averaged across all day, week, month, year, and 10-year periods within a 30-year range. A 54% chance of positive returns on any particular day increases to a 91% chance of positive returns during any particular 10-year period within the 30-year period sampled.

Of course, this data nevertheless shows a 9% chance of losing money in a 10-year span. However, if you are unlucky enough to have invested the bulk of your money at an unfortunate time, this does not mean your decision was bad—just that you happened to have a bad outcome. It takes longer than 10 years for the probability of positive returns to approach inevitability—more like 30 years. Time will tell whether the recent market peak on September 20, 2018 will require months, years, or more than a decade to overcome.

The financial industry is built on confounding decisions with outcomes. A hedge fund manager is said to be “hot,” endowed with stock-picking genius, if his speculations pay off in a given year. Even for investors who were lucky enough to pick him, their decision was certainly bad; picking a low-cost index-tracking mutual fund and sticking with it for many years is a better decision. The speculator’s success is based on chance and luck, not skill. The speculator’s decisions are always bad, although their outcomes may be good, for a time. Eventually, good luck will inevitably run out, leading to underperformance of the index-tracking mutual fund, or worse, a spectacular capital wipeout à la Enron or Bernie Madoff.

We must all take a step back to carefully consider whether a good outcome was actually the result of a good decision, and whether a bad outcome resulted from a bad decision, or from a good decision that should be repeated despite a bad outcome occurring this particular time. On the whole, as a series of good decisions lengthens, good outcomes become inevitable, and as a series of bad decisions lengthens, bad outcomes become inevitable. In making such determinations, our psychology and the limited information available may work against us.

Generally, the amount of time you are invested in the stock market determines your returns, with higher probabilities of positive and larger returns if you are invested longer. This distinguishes investing from gambling. However, you cannot have rewards without risk, and it is entirely possible to lose money in a quarter, year, or even a whole decade.

In 2018, we saw what many define as a “bear” market; the S&P 500 index, which contains stocks of 500 of the largest U.S. companies, reached an all-time high on September 21, 2018 (intraday high), but fell 20.06% from this peak by close of trading on December 24, 2018. Although it went up a bit in the last week of 2018, it was still down 6.2% for the year.

Market declines invite counterfactual thinking—thinking what could have been if you had timed the market correctly, selling at the peak and buying at the lowest point. But, timing the market transforms investing into gambling; no one can consistently beat a “buy and hold” approach. If you try to time the market, the odds are against you; your returns are more likely to be lower than if you had bought and held.

Even Warren Buffett cannot time the market correctly; he had long been saying stocks are over-priced and had been holding much of Berkshire Hathaway’s assets in cash, but plowed much of this cash into Apple, banks, and other stocks in 2018 Q3. However, he would have saved billions by waiting until December 2018. Similarly, corporate stock buybacks have been enormous in recent years, and in hindsight, most were poorly timed.

It is not comforting to look to gains in prior years as recompense for 2018’s losses. Even if you invested in 2009, you still lost money this year, despite tremendous gains in prior years. Many more of us who invested over the past couple years saw our accounts in the red this quarter, erasing all gains and even part of our principal—if we could go back and put the money in a savings account or even under a mattress, we would be doing better now.

To survive a bear market, holding for the long term is critical. Preparations should start in the good times, far before panic strikes. When you invest, you should kiss your money goodbye for at least a decade or preferably even longer; if you’ll need it sooner, it’s too risky to put in equities. The Bogleheads, followers of Vanguard’s founder, Jack Bogle, call this principle “never bear too much or too little risk.”

To ensure you will hold, not sell, in a bear market, you must have at least the following: (a) education, (b) mental preparation, and (c) free cash flow. Without mental preparation, even if you have financial education and funds available to cover your expenses without selling equities, you might still sell in a panic. Without free cash flow, you might be compelled to sell to cover your debts or loss of income. Without education, you might have all your money in one stock (a horrible risk), BitCoin, or with a financial “advisor” who is plundering your portfolio with fees.

Free cash flow can be generated by selling the conservative parts of your portfolio during a market downturn. Depending on how conservative these parts of your portfolio are, they might experience no erosion of principal at all—savings accounts, certificates of deposit, and Treasury bills/bonds come to mind. The idea of asset allocation is to maintain a certain percentage of your portfolio in equities; to stay at this percentage, you would automatically buy more stocks when the market is down (“rebalancing”), because equities have declined as a proportion of your portfolio.

When is timing the market appropriate? Some would say never, but the insidious form of market timing really is jumping in and out of the market instead of holding. Assuming that you are not bearing too much (or too little) risk, timing the market can be appropriate on the way in, if it would cause you to invest earlier, or on the way out, if it would cause you to divest later. Although there is a whole industry built around timing stock purchases based on variables such as price–earnings ratios and geopolitical happenings, these are not much better than astrology. Generally, the longer you are invested in an index fund of the whole stock market, the higher your returns. Therefore, the only good forms of market timing are the ones that cause you to be invested for a longer duration.

The S&P 500, which is about 80% of the U.S. stock market by valuation, returns an average of about 10% each year. Adjusting for inflation, the average real returns are around 7–8%. However, if you were to take a portfolio of 100% Vanguard Total Stock Market Index Fund and withdraw 10% of the balance each year, you could easily run into sequence-of-returns risk (or for short, sequence risk). You could get lucky and have many years of good returns at the start, but you could head toward a complete capital wipeout with a few years like 2018 (or worse, 2008) in the first decade of your experiment. Market timing, via refraining from divesting stocks during market downturns, is an essential tool for retirees, including members of the FIRE community (financial independence, retire early), to mitigate sequence risk. Because this approach to market timing involves holding (not selling) and extending the duration of doing so, it is beneficial or at least benign, rather than malignant.

Ten percent is nice, but neither spectacular nor guaranteed. A savings account can now yield you over 2% per year, guaranteed. With stocks, you might earn 10% in 2019, earn 25%, or even lose 40%. Although credit card companies lose money when people default, overall they are wildly profitable because they collect returns on debts that approach 30% per year. Before you invest, you should pay your credit card debts. Even mortgages and student loans with interest rates around 5% per year might be paid first before investing in stocks; this is a guaranteed return, while stocks may lose value. Of course, if your employer matches 50% or 100% of 401(k) contributions you should do this up to the cap before paying more than the minimum payments on your credit cards, but this is a rare example. Usually, money does not grow on trees.

Take solace. In an index fund of the whole U.S. or global stock market, your investment will not go to zero, and it will eventually come back up. On the other hand, if you have the bulk of your investments in your company’s stock, you could certainly lose everything. Even an entire market sector could get wiped out (e.g., fossil fuels). You can’t have rewards without risk, but you can have risk without rewards. An “investment” can be both risky and more likely than not to be a loser (e.g., lottery tickets). It is your responsibility to learn and know the difference, implement this knowledge, and follow through, especially in a bear market.