The long history of markets is volatility, uncertainty, and during recent decades, meltdowns. The major economic events that have rocked the markets since the Civil War include:

1. The Panic of 1873, which closed the New York Stock Exchange for ten days. The country had 364 railroads and 89 went bankrupt; massive business failures occurred, unemployment reached 14% and the 1870s were dubbed the Long Depression.
2. Another deep depression happened from 1893 until 1897 and resulted in a major political realignment that became known as the Progressive Era.
3. There were panics and recessions in the late 1800s up until WWI. The Great Depression started in 1929 and ended in 1941 with WWII. Unemployment reached 24% in 1932 and millions relocated in search of better lives. Risk-avoidance was permanently burned into the minds of an entire generation.
4. The inflation woes of the 1970s resulted as the country grew increasingly dependent on oil importation. Inflation climbed steadily until the early 1980s and was finally broken with 20% interest rates that incapacitated industries dependent upon borrowed money.
5. The late 1980s and early ‘90s witnessed the S&L debacle and widespread government deregulation that planted seeds for turbulent economic times after 2000.
6. The dot-com bubble of the 1990s went bust in 2000-02. Markets skidded to half their previous levels, wiping out the savings of millions and littering the economic landscape with bankrupt businesses.
7. The housing bubble and profligate ways of Wall Street gave us the Great Recession of 2007-09. Again market averages were cut in half and millions were victimized with job losses and foreclosures. What happens in the aftermath is yet to be written but a slow return to normalcy seems certain.

Along the way we witnessed Japan’s lost decade, the collapse of the Soviet Union, global hot spots of armed conflict, major deterioration of the American dollar, corporate scandals reminiscent of organized crime and ballooning budget deficits that threaten future generations. The economic background is abuzz with job losses, inflation, high taxes, trade imbalances, irresponsible government waste, income redistribution and seriously under-funded entitlement programs on which many depend. So, why bring all this up?

History always repeats itself – never exactly, but enough to make certain that periodic interruptions are a way of economic life. What is the next big event? The economic disruption that again rips the heart out of your retirement takes away your lifestyle, undermines the value of your money, fosters market losses you can’t afford or threatens your economic well-being! We don’t know what it will be, when it will come, how big, how long or the exact effect, but we know for certain it is coming. Could it be an energy crisis created by disruptions in the Middle East? Another terrorist strike on one or more major cities? Runaway inflation spawn by out-of-control government spending? Widespread bankruptcy of local or state governments? Will the failure of entitlement programs like Social Security, Medicare and Medicaid be the cause? Will escalating taxes lead to civil discord? What major scandal is now brewing? Chances are the next Big One will be caused by something unexpected as were the past economic downturns and market meltdowns. What can you do to prepare?

It is tempting to reach for the high return, given recent losses you’ve suffered and the barely positive rates now being paid by banks, but the promise of above-market returns also means above-market risks. It is extremely dangerous to travel across today’s treacherous investment landscape without a professional guide that knows the terrain. Some routes through the investment wilderness are simply not suitable for those who want to get to the other side without losing their lifetime savings. If you haven’t already, you’re encouraged to work with a financial professional to keep your retirement money in places that will be spared the next market explosion. We don’t know when – we hope never – but history says a Big One is on the way. Today’s the time to start preparing.

Shelby J. Smith, Ph.D.

As this is being written, the market is surging upward by 200 points – this comes after a matching downward spiral a few days before. Some sages say the market’s headed higher while other pundits say lower: my position is “you know, you never know”. The recent movements in the market are stomach churning for those in retirement’s red zone or already retired. This group is tired of speculating, too short on time to recover from another meltdown and fearful of outliving their money. Notwithstanding these concerns, the risk averse stays in the market because those benefiting by investing other people’s money have used myths to keep them there. Let’s review several myths used to keep you coming back or stop you from leaving.

In the long run you’ll be better off in the market because it lets you participate in the growth of the economy! In April 1999 the market, as measured by the Dow Jones Industrial Average (“DJIA”), was at roughly 10,500, the same level as today. Anyone caring to compare an economy’s growth, either domestically or internationally, to that of the stock market will learn that the two often go in different directions. This fact is firmly established by Japan’s experience since 1989 and America’s from 1969-1982. What is “long term” varies by individuals but history indicates (a) you may be worse off a decade from now and (b) death also comes in the long run.

Stocks on average return about 10% a year! Even if this were true – which it isn’t – you’d have to buy and sell when prices are average. If you buy at a cyclical peak or sell in a trough, your return will likely be negative. In January 1970 the DJIA was 810. If the 10% rule were true, the market should currently be at 37,000 – the present 10,500 is far short of this mark. Over this period the annual growth rate has been about 6.6%, and roughly half of that has been due to inflation. Is the elusive 10% myth worth the risk?

Now is a good time to buy, or selling turns paper losses into real losses! A good time to buy is before prices rise: but who knows when prices are going to rise? If there is a good time to buy, there must also be a good time to sell! Your broker probably didn’t tell you that October 2009 was a good time to sell. If brokers don’t know the good time to sell, what makes you think they know the good time to buy? Asking a broker the good time to buy is like asking an umbrella salesperson the weather forecast! Brokers never tire of using economic forecast to support their buy recommendations – especially when business is slow. As an economist, it pains me to say “economists make fortune tellers look good”.

The best way to avoid risk is a diversified portfolio of mutual funds! There’s a zillion types of mutual funds – large cap, small cap, mid-cap, growth, income, balanced, international, socially conscious, sector, etc – but all have one thing in common: they rise and fall together with major moves in the market. All mutual funds sank like a rock from October 2007 to March 2009, and rose smartly through year-end 2010 but have stalled since. As the Great Recession punctuated, the global economies are interlocked and move in unison. Mutual funds are always 100% invested in the market.

To manage your retirement money wisely, you must consider options and strategies that do not require you to “time the market”. It’s a fool’s errand to try and catch the market’s unpredictable bounces and turns. Your strategy must also include not running out of money in retirement. So rather than committing all your retirement money to the market, consider moving that amount “essential for your retirement lifestyle” into a guaranteed lifetime income that you cannot outlive. Yes, this strategy does exist because as the ranks of the retired have grown, the insurance industry has crafted ways to protect you financially from living too long. Ask your financial advisor to explain how an annuity delivers a safe, worry-free guaranteed lifetime income.

Shelby J. Smith, Ph.D.
August 2010