In a Wall Street Journal Article on August 15, 2011 titled “Which Way to Retirement?” Kelly Greene wrote:
“Hitting the “sell” button on your stock portfolio, after the Dow Jones Industrial Average has fallen 11.1% in three weeks’ time, could hurt you more than anything else. Not only would you be locking in losses prematurely to preserve capital you might not need for years, but you also would miss out on any future rally.”
The article goes on to tell horror stories about people who had planned to retire but now can’t because of market losses. Here are a couple excerpts:
“Lynette Robinson, a 65-year-old executive director of a consortium of colleges, was planning on retiring this November —until her investments took a hit this past week.”
“Kevin Fitzgerald, a 55-year-old marketing executive in Highland, Colo., says he regrets not hedging his 401(k) investments after watching his account lose $250,000 — one-third of its value — last week. Now, he expects to work at least 11 more years.”
Notice article’s advice: don’t sell now because “you’ll be locking in losses”, “you’ll miss the coming rally” and later advice was given to purchase a variable annuity. A variable annuity is simply a very expensive (pointed out in the article) mutual fund in an insurance company wrapper to make it tax deferred. Yes, you can get lifetime income from variable annuities but if you decide to bail out early you’ll get the underlying value of the sub-accounts, i.e., mutual funds, and if the market is down they’ll be underwater.
From this article we’re led to believe if we sell now we’ll be “locking in losses”. Would it be fair to say that if the market continues to fall we could be locking in smaller losses? Surely we’re not being told that this is the bottom because no one knows where that might be. Second, since we’re advised that we could miss the next rally, does this mean there will be a “next rally”? What is not being told about the next rally is “when” and “starting from what level”. Last time we had a meltdown it continued until losses were 54% and then it started to rally, stalled and then headed south again. We’re currently a long way from the last peak and there’s speculation about another market meltdown. What then?
The WSJ article is very typical because the “safe money” options are never considered. What is wrong with saying “the stock market is too risky for those near retirement who cannot afford to retire if the market declines”? What’s wrong is that the authors of such articles and their newspapers are influenced by the loud voices of Wall Street and Wall Street does not offer safe money options. Since Wall Street only makes commissions when Main Street keeps their money in the market (so they won’t realize losses or miss the next rally), I’m not surprised at their “hang in there everything will be fine in the long run” advice. Did you know that the S&P is currently at the same levels as 1999 and that’s before inflation is taken into account. Is 12 years long-term? It is if you’re retired – in fact, it’s about half the typical retirement. So maybe you will not be “good in the long run”.
My advice to those in retirement’s red zone is to take their money out of the market unless they can afford to lose it. If they elect to ignore this advice, they may have to forget retiring, work longer or settle for a watered down retirement. Look at any 401(k) and you’ll see only market options. Most employer-sponsored retirement plans aren’t retirement plans at all, they’re “investment accounts”. By not selling you’ll avoid losses, catch the next rally and live happily ever after! Why do retirees continue to believe this nonsense when history proves it’s a myth?
Shelby J. Smith, Ph.D.
August 19, 2011