The Hard Truth About Stocks – a Follow-Up

October 15, 2009 by  
Filed under Investing

Several weeks ago I announced the launch of my Failsafe Retirement blog and site. In that post, I cited an interview of Prof. Zvi Bodie that was published in the October issue of Money Magazine. The interview was captioned “You Can’t Handle the Truth About Stocks.” You may recall that Bodie believes that most investors take on too much risk by relying on the stock market to provide retirement income.

He instead recommends inflation protected securities guaranteed by the government. Today I received my November issue of Money Magazine. I opened it immediately to see if the editors had published any reader reaction to Bodie’s views.

Indeed, there were two letters published, with contrasting views. First, there was this in support of Bodie:

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.

I found the comment about a “normal” return to be insightful. So many investors – baby boomers in particular – were hypnotized or brainwashed by the bull market of the 1990’s. Consequently, they may still have an unrealistic perception about what a “normal” stock market should give them.

There is another group of investors who have done such a poor job with systematic savings that they are desperately hoping that the ginormous market returns of yesteryear (yesterdecade?) will come back and save them.

I don’t think so.

I am as happy as the next guy about the advancement of the market since March 2009. But don’t get carried away with the “Dow above 10,000″ cheering. Do you remember the first time we got excited about hitting that milestone?  March 1999.  (Read some “Dow hits 10,000!” nostalgia.)

That’s right folks. We are right where we were over ten years ago. (Actually, we are worse off if you consider ten years of inflation.)  A complete “lost decade” for the long term investor. Can you picture Bodie nodding his head?

Here is a comment from another Money reader in response to the Bodie interview:

[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 “I won’t deprive myself” attitude is inherent in our borrow-to-spend culture. This is the same attitude that transforms itself into “bail me out” when things don’t go well.

I like Bodie’s idea better. Don’t bet your retirement future on rank speculation and don’t count on government bailouts when your gamble fails.

Finally, I found an advertisement in the same issue of Money to be pertinent to this discussion. The ad was promoting Prudential’s Retirement Red Zone and has images of two adults talking across a table.

The first investor says: “Hey, stuff happens. Our retirement savings took a big hit.”

His friend/spouse responds: “Well, what if stuff happens again?”


I agree with the point Prudential makes in the ad: You can stuff the “stuff happens” attitude about investing for retirement income. Prudential’s follow-up will be to encourage you to buy an annuity. That may work for some but Mrs. ToughMoneyLove and I are going in a different direction with our failsafe plan.

What is your hard truth about stock investing for retirement?

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11 Responses to “The Hard Truth About Stocks – a Follow-Up”
  1. Evan says:


    Where did this entitlement come from? I use my dad as an example, he was making middle six digits for a good amount of years, but didn’t save at all and then when Sh!t hit the fan he still thinks he DESERVES the luxary car and the 5,000 square foot house. I have been fighting with him tooth and nail to slow down the spending. I feel like I am the parent lol

  2. Matt SF says:

    Good post. I constantly think back to the ‘bull’ that was in the bull market of the late 90s.

    I’m probably a little jaded since I see remnants of the hype in nearly all facets of the market now, but if 4% is really going to be the ROR for long term investors, I think many people will be looking elsewhere to park their investments.

  3. MasterPo says:


    I disagree with you on two points.

    Regarding being back where we were 10 years ago, does that take into account re-investment of dividends? Probably not.

    And regarding the spending, while I totally agree about excessive spending, “spending” is the fuel for any good economy. If people just buy the bare basics of life (basic food, basic clothes, basic shelter, basic transportation, basic medicine, etc) there’s not much innovation, grow and expansion in that.

  4. kitty says:

    I am with Master Po here.

    Not only didn’t you take into consideration the dividends, I am not sure this number takes into consideration the recent gains. I sure got most of what I lost back… I actually moved some chips “off the table” now.

    Now, those near retirement shouldn’t be 100% investment. Also, we should pay attention to the economy; as they say “buy and hold” isn’t the same as “buy and forget”.

    Also regarding spending – yes overspending and leaving beyond one’s means is bad. But Master Po is right about the effect of excessive thrift on the economy. Plus, each and every one of us can find out tomorrow we have a terminal illness. As with money, we need to “diversify” in our lifestyle: save some in case we live long or need money for emergency and spend some so that we enjoy life a bit.

  5. Rob Bennett says:

    Bodie and Bogle are the two extremes. Bogle says “ignore prices and just go with the same stock allocation at all times.” That’s never worked. Bodie says “avoid stocks.” That delays your retirement by many years. That’s some price to pay for wanting to avoid taking on insane levels of risk.

    How about investing in stocks responsibly by taking valuation levels into account when setting your allocation? When the price on stocks is so high that you can get a better long-term return on risk-free asset classes, avoid stocks. When stocks offer the better long-term return, go with stocks. To me that’s a healthy balance of the desire to obtain a decent return with the desire to avoid wipeouts.


  6. Rob – I agree with your observations but will add this: Use Bodie’s ideas for worst case scenario planning – to secure a baseline level of inflation-adjusted retirement income. Use the rest of your money to wisely invest in the market, taking into account valuation levels. If you are fortunate and wise, your retirement income goes up. If the market tanks despite your best efforts, you still have that baseline income to fall back on.

    Kitty and MasterPo – The dividend yield is helpful but for a broad index investor, not enough by itself to beat inflation. Plus many of the “best” dividend stocks cut or eliminated dividends in 2008-2009. For these reasons, I still say that 1999-2009 was a lost decade for the long-term investor.

    I am in the market and will stay in the market. It’s just that I’m going to secure a baseline retirement income with TIPS and I-Bonds to eliminate the risk of having to “unretire” or live on beans and rice.

  7. kitty says:

    @TML – I actually agree with you. I was about 60% invested before the crash (less in 401K more in taxable accounts), hence my losses haven’t been nearly as dramatic. I bought a bit more stocks this year – both in 401K and in my taxable accounts, also some corporate and municipal bonds last year and in the beginning of this year when the yields were great. This worked out pretty good – my return-on-investment in 401K since January 2008 is -10%; my return in taxable account is positive probably because of the strong performance of my ESPP stock. Regardless, -10% ROI in 401K is a miserable return but way better than that of most people.

    But recently I moved a little bit of money in 401K to stable value, reducing the percentage of stocks in 401K to 40%. In taxable accounts it’s around 55%. I am still buying though, but depending on what I see happening, I might reduce the percentage that goes into stocks there as well. But finding a good place for the money now is tricky: stocks and commodities run up quite a lot and so did the bonds; CDs are yielding very little, current I-bonds return is 0% and fixed portion is pitieful, TIPs aren’t yielding much these days either.

    So yes, I agree about keeping a large portion of retirement money safe. All savings because whether you label money for retirement specifically or not, any money you aren’t spending now are there for retirement.

    I also think that one should consider if one even needs to risk the money. If someone will have enough with risk-free investments, there is no need to invest anything in riskier investments.

  8. Now that you mention the Dow Jones Index above 10,000 points as it was in 1999 does bring back memories. I do recall when March 2000 came because 90% of stocks when south. The year 2000 was a bear market until mid 2003.

    I do feel that the market has rebounded tremendously and it is amazing considering there is no real reason. Unemployment and earnings from many companies are not booming like it did in 2003.

  9. JimmyDaGeek says:

    Bodie is wrong, wrong, wrong. In the short term, the market is a crap shoot. Of course, the market could go down again, but why? He doesn’t address that, he just makes a flat-out statement. The whole idea of reduced risk assumes that different asset classes move differently in any given market. Of course, if the economy went to hell, like it did in the last year or so, all asset classes are going to drop. But there are exceptions. Look at Walmart!

  10. JimmyDaGeek: The second part of your comment contradicts your statement that Bodie is wrong. Look what happened in 2008-2009 to long term investors, proving Bodie is right. We don’t need to know why the market tanks to understand that it has and that it will again. If you want to take that risk (a crap shoot as you say) with your baseline retirement income, that’s your choice. Not me.

  11. 401k Planner says:

    It is unbelievable that the stock market is about to finish the year in a plus percentage. Considering the down years from 2007 and 2008, 2009 will double the outgain from the following two years.

    Ok, so the question for this story should be to vote for 2011 and what to expect.

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