When I retired in 1997, the stock market was in full bloom with stretches of earnings year after year. Those years everyone was a successful investor, so every investor thought he or she were great investors. However, in effect, what was simply happening was that everyone’s investment success was market driven enabling ordinary investors to make money without any market intelligence.
However, most investors did not realize their gains but instead held on tightly in the hope the market would keep rising higher and higher (and indefinitely). In other words, investors had a great imaginary X, Y regression line moving north-west. In the high rise of the market, investors took more risk by buying on margin or borrowing money to buy stocks using the house as equity. Then of course, the market came crashing down in the year 2000 and many folks lost a lot of money that made them look like idiots and poorer as well.
The toughest time for UN retirees to retire was in the early 90s as the temptation to put pension money in the stock market was at its highest and many retirees yielded to that temptation. In some sense, when retirees take their hard-earned pension money, convert that to a lump sum, and then risk it in the stock market, one could conclude that these retirees have arrived too late for the party.
In traditional American fashion, young people get into the stock market at an early young age as their retirement income depends, not on a pension but from investments in the 401k. So from an investment perspective, these young people enter the party early, and on reaching retirement age (60-65) they are then ready to start using their accumulated savings/investments to serve as retirement income. In the meantime, these investors have gained a whole lot of experience in dealing with the stock market.
Whether an UN employee considers age 60 as arriving too late for the party is not a valid conclusion in all circumstances. It all depends on the personal circumstances of the individual and the objectives of investing money in a stock market even at that age. The cardinal principle that many people, both young and old miss-out is the objective of investing. What is the objective of your investment?
One retiree may be in such a situation that he/she needs all of the pension money for retirement. In that case, one can conclude that this retiree has indeed arrived too late for the party because it is just too risky to plunge into the stock market at 60-62. In that case, if this individual is in good health, it makes sense to take a full-pension and keep at bay all gurus who say that they can double your money in a few years.
On the other hand, another retiree may just find that he or she can live very well on the reduced pension and wish to invest the lump-sum pension for the benefit of heirs (children and grandchildren or other deserving young relative). Now in such a case, the retiree is passing on the party invitation to younger members of the family for celebration later. In that case, the lump sum, all of it or a portion thereof can be put at risk since the beneficiary is someone other than you. In this instance, it is clear that the objective is to save for the future of other loved persons.
It is clear from the foregoing that to generalize that 60-year olds must have 60% in bonds and 40% in stocks is not representative of every personal situation. For instance, it does not make sense for a 90-year-old who needs the money to have any risky investments. Of course, assuming this person can live up to a 100, he or she may still have a small amount of money invested in growth stock.
William Bernstein has put it nicely. “Investing is never about return,” he says. It is also about controlling risk. If you have already won the game, what sense does it make to go on playing?” However, Mr. Bernstein goes on to say, that if you have enough money you can go on taking more risk, not for yourself but for your beneficiaries.
References:
1. Yesterday’s Market Lesson: Maybe You’re Overstocked, BY Jonathan Clements, WSJ 2/27/2007.
2. Investors tiptoe Back to Markets, by E.S. Browning, WSJ 3/1/2007.
3. Many Happy Returns by Jeremy J. Siegel and Jeremy Schwartz, WSJ 3/1/2007.
4. My Lunch With 2 Fraudsters: Food for Thought for Investors, WSJ 3/3/2007 End
Further reading: Investing through the ages. Also numerous articles on personal finance appear on 2merrill personal finance index and unwind personal finance index.
Disclaimer: The above essay is presented solely for "educational purposes" and does not hint or offer any specific financial advice. For financial advice, please seek the advice of a professional if you feel unable to handle your own finances.
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