Let’s say you and a friend each start a long journey. You select a sleek sailboat but your friend chooses a small boat with a modest motor. The first day the winds are brisk and you make great progress. Your friend, not so good! The second day unfavorable winds caused you to give up the previous day’s gain but your friend moved forward. The third day there was no wind and no progress. Days turn to weeks and weeks to months. You’re blown off course and lose your way but your friend arrives on time and in good shape. This saga sounds a lot like the tortoise and hare, but it is actually the journey of retirement.
You select the unpredictable way to get there and put your money in the stock market. One day you make great gains but give them all back the next day. Adding to your woes is what will happen tomorrow or the day after. Will you be blown off course and fail to reach your retirement destination? Your friend chose the dull way by putting money in safe places and makes steady, but modest progress, always in the same direction.
In recent years the stock market has been a “risky place” where you can lose, or make, big money. At the turn of the century it melted down in response to the dot.com boom and bust, fought its way back to a peak in late 2007 and then reversed directions as the housing collapse took hold and spawned the Great Recession. The bottom came in 2009, thereafter inching higher until July 2011 when it again reversed after regaining about two-thirds of the previous losses. At the current time there is paralysis in Washington, global economic and political uncertainty, mounting inflationary pressures, historically high unemployment, the lowest interest rates in a generation and a dismal economic outlook. In response the stock market continues extremely volatile and risky.
Against the odds of realistic expectations, many retirees continue to hope and pray their money in the market is safe. Wall Street and brokers are saying, “Now is a time to buy, good times will return in the long run and don’t sell”. Here are the facts: the stock “market is a gamble because you can win or lose; you may do fine longer term but there are no guarantees; if you are in or near retirement the long term may be too long; no one knows the future; the stock market could be on the precipitous of a secular decline that could last for decades (witness Japan); if you lose your retirement money there is no time to replace it. If you believe these facts, you may want to consider decreasing your market exposure unless you have more than needed for retirement and losses will not affect your lifestyle. You know your circumstances, so please act accordingly.
Shelby J. Smith, Ph.D.
September 6, 2011