It is never easy to pinpoint the exact beginning of a crisis. Pinpointing a retirement crisis is even more difficult. You can assume that because one event usually leads to another, at least in our experience with these sorts of things, a crisis would be relatively easy to predict. But even in the short-term, and the weather is a good example of this, you can never be absolutely certain until you are actually in it. It is like that with retirement.
If the last two years have taught us anything about what retirement is, it has been that it is not what we thought it was. We planned (except we did so with the most optimistic of outcomes) and we invested (although to this day we still say we were saving for retirement) and we took out-sized risks (thinking if the person next to me is counting his unhatched chickens, I should be doing the same, except counting more). And for the most part, we all found out how wrong this kind of thinking can be.
The Conservative Retirement Investment Approach
And now, we have run in the complete opposite direction. Well, I am here to tell you: run towards the danger. As I flip around the channels in the morning, the buzzword I hear most often (often enough it should be part of some sadistic drinking game) is the word risk. Most of the folks who use this term do so as if they were talking about a new strain of infectious disease. To be risky is to be infected with no common sense. After all, look where risk got us.
Retirement is a risky undertaking. And many of us will find out when it is too late, that we didn’t take enough risks. Or perhaps I should clarify that: we didn’t take enough smart risks.
Most of the trouble we experienced came at the hands of greedy financial sorts who made risk seem as if it was as common as the air we breath. It was a cascading effect of one person falling for it and then another until whole countrysides bought into the notion. Then it went global. When folks found out the risks were not good, they made the next natural leap and assumed that all risk was bad. All snakes are not poisonous. All rainstorms don’t lead to flooding. All risk was suddenly the same. The first question we wanted to know was how much risk was involved.
The Retirement Risk Question
Posing this question in front of a retirement planning decision is making the assumption that risk is not part of the equation; and if it is, how much can I control it? Before I answer that, let me tell you about the high amount of risk that remains out there. This is sort of like telling you that the question is mostly worth asking.
Equities are poised to correct in the next six months – big time. You can expect that once investors are allowed to make the connection between no hiring and no customers, even if those numbers are improving slightly, stocks will begin to sell-off. You can expect that once investors realize that no jobs and no hiring means no housing sales, although those numbers will improve as well, stocks will slide even more. When billion dollar portfolio managers are saying invest in volatility, this is what they mean.
Because the vast majority of us are invested in equities via the mutual funds available in our 401(k), the knee jerk reaction will continue as we begin to stop force feeding our retirement plans with money we feel as though could be lost to risk. We will do this no matter what we own: index funds, target date funds, bonds, whatever it is, we wil pull back.
Bond mutual fund have seen enormous inflows over the last couple of years. Equity mutual funds, as you many of you already know, have not seen such affectionate support. Bonds have been helped by the surging interest in target-date funds, which make a portion of their portfolio focus on this conservative fixed security. That loss of retirement portfolio values has also given a great many investors the feeling that everything they knew about equities was simply not true. The stock market did not do what they assumed it would do, or better, would do what it was promised.
But many of us running from risk will find the shady tree that bonds are is no protection when things go sour. In fact, the maturity wall now being discussed is a very real threat. The maturity wall refers to a time in the very near future when many businesses will be faced with a refinancing option that may not be as low-cost as they may have assumed. The yields many of these refinanced securities will be offering (bond prices move in the opposite direction of yields; when prices are low, as they are now, yields are high) will prove too costly to be profitable. This will include not only corporate bonds but municipal offerings as well. And if Treasury offerings find no takers or a lower debt rating, it will be very bad indeed.
When Risk Bites Hardest; Bite Back
So what does that leave? You will need to run towards the danger. This will require you to make some sort of time horizon determination. If you are in your twenties and thirties, get into actively managed funds, contribute as much as you can and keep doing so. The reason: if those aforementioned adjustments take place, prices will drop and you will have the rare advantage of buying more for less.
If you are in your forties and have made some adjustments to your portfolio with more conservative investments (like balanced funds or target date funds), leave them alone and shift your contributions towards more equities. Once again, this will allow you yet another option to buy on the way down. You probably sold on the last dip. Don’t make that mistake again. Had you stayed put, evidence is beginning to prove, you would be almost back to where you were at the end of 2007, the year before the collapse.
If you are in your fifties, the best you can do is increase your contributions and get your financial house in order. This is prime time to make concrete plans about what you envision your retirement will be like, how much you will need and how much you have. Refinance your mortgage and pay off your debts. (Easier said than done; but if you don’t focus on that now, you will not come close to where you want to be, healthy portfolio or not. Good advice for all of the previously mentioned age groups, but doubly so for this group.)
Among all of these age groups, diversity among as many asset classes as possible is still key. We are no longer in the “set it and forget it” world of retirement planning.
I am alarmed with the amazing frequency of these downturns and the more amazing swiftness of the recoveries. This means that there will be more risk, more often. Running from it, may not prove to be the wisest move in the long run.
Related posts: