Category Archives: Stock market investing

The Stock Market is for Fun Money

Nassim Nicholas Taleb is a well-known scholar of mathematical finance.  Taleb teaches risk engineering at New York University.  He is also the author of a major best-selling book:  The Black Swan. In the world of personal finance, a “black swan event” is a massive change in investment  conditions which is either predictable or unpredictable. Either way, the black swan event  has a disproportionate impact on the finances of those touched by the event.

I would say that the market collapse of 2008-2009 qualifies as a black swan event for retirees, wouldn’t you?

Many would say that this was a black swan event because almost every asset category- even those thought to be non-correlated – went down together.

A corollary aspect of black swan theory is that people blind themselves to to the potential effects of black swan events on the world around them.  When they do occur, folks pretend that they knew it was coming all along,  expected it, and were prepared for it. This sounds like the investment and Wall Street finance community doesn’t it?

Taleb recently gave a speech in Canada that was critical of the stimulus policies of the U.S. government. Taleb believes that governments need to cut debt and refrain from bailing out failing companies. That, according to Taleb, is the only way that governments can shield their economies from the negative consequences of erroneous budget forecasts.

About forecasts, Taleb said this:

Today there is a dependency on people who have never been able to forecast anything. What kind of system is insulated from forecasting errors? A system where debts are low and companies are allowed to die young when they are fragile. Companies always end up dying one day anyway.

This over-dependence on financial forecasting applies to investment markets as well.

Taleb was critical of banks and securities firms because they do not properly warn investors of the risks when they invest their retirement savings in the stock market.

This leads to a key warning from Taleb’s speech concerning retirement investing:

People should use financial markets to have fun, but not as a depository of value. Investors have been deceived. People were told that markets go up regularly, but if you look at the last 10 years that’s not been the case. The risks are always greater than what people are told.

I wonder if Zvi Bodie and Taleb know each other?

Now you understand why I created the Failsafe Retirement System and why I am using it myself.

Here is a link to an article reporting Taleb’s speech.

Rethinking the Risk of Stocks

The mainstream investing media may finally be getting it. A recent “Ask the Expert” article from Money Magazine tells us that we should “rethink” the risks of investing in stocks.

Well, duh!

What is significant about this particular article is that it cites actual research to support the author’s premise:

After a 75% surge from a little more than a year ago, stocks have plunged 12% from the beginning of May through yesterday’s close.

Unfortunately, recent research from Morningstar and Ibbotson Associates suggests that stocks are more prone to these sorts of convulsions than you may realize.

In the article, the author recommends that prospective retirees “get guaranteed income.” That’s what I’ve been preaching here, for a year. The author suggests annuities. But what about inflation?

I think we will see more of this attitude adjustment toward equity investing in the coming months. Who knows – Zvi Bodie might become mainstream!

The Truth About Stocks Aftermath

I received my November issue of Money Magazine today. I was curious about any reader reaction to last month’s interview with Zvi Bodie which the magazine titled “You Can’t Handle the Truth About Stocks.” The editors printed two reader letters responding to the interview. One had this to say:

I wish more people had the guts to expose the truth on investing. Fear and greed motivate investors to take risks. If people considered 4% a “normal” return, they would hardly have to take any risk at all.

Clearly this writer is a Bodie fan. I like her point about what people consider to be a “normal” return. Maybe the huge bull market in the late 1990’s was bad for our collective investing psychology. Too many of us seem to be hoping or even expecting a return to those “good old days.” I think they have a long wait.

That was the attitude of the other writer, who had this to day about Bodie’s views:

[W]ho wants to deprive himself to save 30% of his salary and work like a dog until age 75? Rolling the dice on stocks is a lot more appealing.

This “investor” certainly doesn’t believe in the principle that the pain of discipline is much less than the pain of regret. By this I mean that he is unwilling to make lifestyle sacrifices now to insure that he will have a self-supporting lifestyle when he retires. This is the same attitude that led to our current economic crisis.

What happens if he loses that “roll of the dice?” It’s not our problem. Bodie warned him, didn’t he?

By the way, which of these letters to the editor do you think was printed with a larger font? You guessed it – the Bodie skeptic received top billing. After all, so much of Money Magazine is supported by advertising from the investing industry.

Avoiding the Retirement Postponement Strategy

A standard retirement planning recommendation heard these days from financial advisers is to postpone your retirement and work longer.

Who wants to hear that? That “strategy” is almost as bad as unretirement. The folks who are telling you to delay your retirement are the same “experts” who put you in high risk investments to begin with.

Here is a story about a physician who has twice changed his retirement plans. The first delay was caused by the post-9/11 market crash, which caused a 50% drop in his retirement investments. That moved his planned retirement age from 55 to 60. Now he is delaying his plans again because of the 2008 market crash.

What if it happens again? And again?

There is a better way. Use at least part of your retirement savings to fund a guaranteed income plan. Fund that income plan with investments that cannot go down in value and that cannot be damaged by inflation. Then when your planned retirement age arrives, you retire, no matter what has happened to the market. Bingo.

Maybe the process of designing your guaranteed income plan will cause you to adjust your retirement income expectations, but so what? It’s a lot easier to do that than to sit by and watch the value of your conventional stock and bond investments fall off a cliff, completely destroying your plans.

Don’t be a victim. Take control. Think about it.

Stock Picking Can Ruin Your Retirement Plan

Many stock brokers, financial planners, and even DIY investors believe that picking individual stocks is the key to avoiding massive portfolio losses as experienced in 2008 and early 2009. That’s a variation on the theme that managed funds are superior to indexed funds. There is abundant evidence that disproves that notion.

Even the experts are acknowledging problems with traditional ideas of risk vs. reward equity investing. In this story, one financial manager puzzles over why Apple stock took such a tumble in 2008. Finally, he concludes that “The macro influence will dwarf individual stock situations.” In other words, when the economy itself is suffering, nervous investors will flee all sectors and cause otherwise “good” stocks to fall in unison. At that point, it doesn’t matter how smart you are, your smart picks will be punished. If those “smart stock picks” are intended to provide your basic income in retirement, you are in trouble.

Along the same lines, this recent article questions whether investors can rely on the financial planning advice from advisors tied to the retail investing industry. This columnist’s thoughts are summed up this way:

After the financial meltdown that gutted some portfolios by up to 50%, after Bernie Madoff, Earl Jones and this week’s Ponzi scheme fraud charges against two men in Alberta, investors are understandably questioning the basic relationship between them and the industry, to the point that financial advice itself is under fire.

Though stock portfolios are looking better now than six months ago, some people are thinking that the financial advisors who stood by and watched as two stock crashes in a decade wiped out trillions of retirement savings might be, say, surplus to requirements.

Entrusting your retirement income needs to those who are motivated to sell you investments can be dangerous indeed.

The Truth About Stocks and Retirement

What an interesting coincidence that in the same week that I launch the FAILSAFE RETIREMENT™ System, Zvi Bodie is interviewed in Money Magazine. In an article entitled “You Can’t Handle the Truth About Stocks”, Prof Bodie makes the case once again that the risks inherent in equity investing do not decline over time. He sums it up this way:

The standard models that are used to give investment advice to millions of Americans are fundamentally wrong. We’re told that over time, stocks get less risky, but that’s bull. Stocks are always risky — whether in the short or long run. Prices dropped by 37% last year. While improbable, there’s nothing to say they couldn’t drop by that much again next year or the year before you retire. And diversification doesn’t take away that risk. That’s why retirement money belongs in truly safe assets whose value won’t go down — not in stocks.

The article provoked a lot of comments on the CNN/Money site, many of them critical of Bodie’s position. I think many of the criticisms are based on a flawed understanding of what Bodie is trying to tell them. They say that there is risk associated with many aspects of life and that equity investing is just another one of them. Risk is not to be avoided, they say, but carefully embraced.

The assumption of risk is fine in many circumstances but only in when you can recover from a losing bet. If you choose not to insure your car against collision loss, you can probably recover from that. If you choose to gamble $1000 in Las Vegas, you can probably recover from a series of losing bets.

On the other hand, if you choose to work without disability insurance and become permanently disabled, you and you family will more than likely end up a charity case. So it is with retirement income planning. If you put your  retirement income baseline in the hands of the equity markets, there is a real chance that you will lose. Losing means you will not have enough money to support yourself in retirement. This means unretirement or worse, becoming dependent on others.

This is Bodie’s point. Investing for a baseline retirement income should be free from two risks: risk of loss and risk of diminished spending power caused by inflation. Equity investing does not fully address either of those risks, either in the short term or long term.

It is hard for entrenched interests in the investing industry to accept the hard truth in Bodie’s arguments and data. The same goes for investors who have bought into what the retail investing industry has been been selling.

Take care of your essential retirement needs first. Then take your risks in the stock market.