Last week you provided some great advice to Denise, a hypothetical 57-year-old single woman who wants to do a better job investing for retirement. She doesn’t want to retire now. But she’s worried. She’s lost a ton of money with her growth mutual funds and she doesn’t know what to do at this point.
She wants to grow her money but she’s deathly afraid of suffering through the kind of losses she had to deal with in 2008.
What to do?
Reader Daniel suggested that she stick it out with the equities.
On the one hand, this is really good advice. I recently read a report that explained how stocks do much better than bonds. The article explained how if you examine all the 20-year periods, the average return of stocks beats the very best 20-year return of bonds. In effect, equity investing is on the list of prime residual income ideas. Since Denise is probably going to live longer than an additional 20 years, equity investing is certainly financially sound.
The problem of course if that we’re human. People who buy investments don’t do nearly as well as they should. Why? Because we panic. Regardless of the logic, our heads tell us one simple lie and it derails us.
Do you know what that lie is? Here it is:
“This time it’s different.”
This time:
a. The sky is going to fall.
b. The market will never recover.
c. The markets are going to collapse completely.
d. This really is the Final Goodbye Rolling Stones Concert – they ain’t coming back.
Is it really different this time? Well, it could be…but that kind of thinking hasn’t helped anyone I know. The odds are against you if you think the sun is not going to shine tomorrow. Is it possible? Yes. Likely? No.
But at some point, the pressure is just too great for many of us. We get out when we should stay in. That’s why we need an alternative. We are emotional beings. We can’t ignore that element of ourselves.
Evan suggested she split the money between equities and bonds. He also asked if Denise has annuities because they would help her weather the storm.
While I’m not usually a fan of annuities, I have to give Evan credit. In this particular case, the annuities would have given Denise some added stability. I’ve written about the annuity contract before so I’m not going to go through it again here.
I will say that while the annuity would have helped Denise in 2008, it’s not likely that overall, it would have been the best way to go. Still, for some clients, that added security might be just the ticket they need.
Even though we want to do as well as we can, investing is not a question of what will make you the most money. People sometimes think that is the question, but it’s a huge error. It’s a lie. The people who tell you this lie are often just shiesters who want you to take on very risky investments so they can collect huge fees.
So here is the idea I really want to share with you.
Don’t ever feel like a jerk for accepting lower returns than other people.
Don’t feel like you are ignorant or less-than. It’s not true. You might be much more aware and educated than your risk-taking friends.
It never makes sense to take more risk than you have to. If you can reach your goals by making 1% in the bank – do it. Nothing wrong with that. (Of course, it’s important to be aware of your real financial needs over your entire lifetime and factor in inflation. This can only be accomplished when you begin creating a financial plan.)
As Evan and RJ suggest, Denise needs to understand the real financial and emotional consequences of her decisions. She needs to understand that if she puts all her money in the bank, she may not meet her goals. She also needs to understand that if she puts it all in the market, she may lose all her hair with worry. A balanced approach is a compromise.
The struggle is not going to be with the markets for Denise. The struggle is going to be within herself. She has to find a way to accept the realities and consequences of her decision.
What further steps do you think she needs to take? Do you think Denise will be able to stick to this plan? Will she get greedy when the market takes off? Will she have a nervous breakdown?
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{ 4 comments… read them below or add one }
To answer your question “Will she get greedy when the market takes off?” I think Denise needs to have a goal, a certain amount of money at which point she will be happy with her situation and switch to a more conservative approach. Once she reaches that amount, she should be changing her investments slightly.
She has seen what market volatility can do, so she should be looking to reach her goal, not exceed it. Once she reaches her goal, if she still feels that there is more to be had in the market, she can use a portion to take risks, but should not put a significant of her money in stocks.
Daniel,
I agree with the logic of your comment. I also have experienced situations where folks get caught up in the moment. I think it’s really important to keep having this discussion so folks remember the trade-offs.
Sometimes, I think we have built-in “forgeters”.
Neal,
I think it is great that you bring it down to a risk question, because that is what it is! If Denise is high flying crazy chick betting it all on black and screwing consequences then yeah keep with equities, if she is losing sleep scared – get out of equities for the most part.
However, my question comes back to…How many wealth managers would have offered her the fixed (or even the dreaded variable, with the added benefits discussed in your great post last week) annuity to begin with? or how many would have kept with the – I hate annuities?
Evan,
My fear is that Denise’ “comfort level” w/shift and that’s what I’d like to help her avoid.
W/regards to annuity….you bring up a really powerful point.
I fear you are right. Most people (advisers and clients) tend to ignore facts when they collide with their beliefs.
People find it almost impossible to say “I WAS WRONG” and that’s too bad.
Again, I am not a fan of annuities generally. But there is no question that the annuity holder from last year did better than the stock investor – even with the recovery this year.