The Hard Truth About Stocks – a Follow-Up
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.
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?