One of the frustrating things about politics is the sense of futility one gets. I live in Texas, a winner-take-all state that always goes Republican in a presidential election. I live in Houston, which has gerrymandered districts in which incumbents almost never lose, mostly because they are never even challenged. The inevitable result is apathy, a reasonable attitude to have regarding something beyond one’s control. I manage to overcome this apathy just enough to vote the straight Democratic ticket, but that is about all. As most of the people I play bridge with are Republicans, the opportunity does arise occasionally for a discussion of politics. Theoretically, there is the possibility that a nice argument might persuade someone to reconsider his political views, but as a practical matter, it never seems to happen.
In many ways, one also gets a sense of futility when it comes to the economy. As with politics, there is nothing I can do about America’s fiscal policy or the monetary policy of the Federal Reserve, and there is nothing I can do about whether Obamacare will be repealed or whether there will be tax cuts for the rich, except to become more apathetic. As with politics, I can engage in discussions of economics with the Republicans I play bridge with, though without any hope of persuading anyone to my point of view. Occasionally, when my partner and I are down by over a thousand points, I will casually remark between hands that I think it would be a good idea to raise taxes and cut defense; for my Republican friends are not apathetic, and there is the hope that my offending comment will be so disturbing as to throw them off their game. I actually think it has worked once or twice.
Unlike voting in an election, where there is the nagging feeling that that one’s vote does not count, one’s vote when it comes to personal finances can have consequences of great significance. Far from producing a feeling of apathy, making decisions about one’s own money can produce a great deal of anxiety and insomnia. You can read all the books you like, allowing others to persuade you to invest your money one way or another, but when it comes to time to buy or sell, you don’t have to persuade anybody. The stakes are high, and you are on your own.
In one sense, I am quite fortunate. The amount of money I have saved in combination with my Social Security checks is adequate for the necessities and a few luxuries. So far. There is a lot of longevity in my family, so even though I am seventy years old, I may have to support myself for decades. And that means that if I make a mistake with my money, I may find myself facing a hard old age.
Until recently, I had been rather sanguine about my investments. The stock market had been advancing nicely since 2009, and the dividends I had been collecting had been giving me a warm feeling of security. But then things started becoming worrisome. The stock market, by many metrics, had become overvalued. The “Trump bump” made it even more so. The Federal Reserve had started raising interest rates, and they are talking about unwinding their four-and-a-half trillion dollar balance sheet. And then, on March 4, 2017, Trump tweeted that Obama tapped his phones and that Obama was bad or sick. That was the proverbial last straw. I said to myself, “This will never end well,” and on Monday, March 6, I sold every share of stock I had. But now, instead of those nice dividends, the interest I get having all my money in a money market fund is less than one percent, which in turn is less than inflation, giving me a real return that is negative. So, instead of worrying about a bear market, I now have to worry about declining principal.
Anyway, among the Republicans I play bridge with, there are several retired financial advisers. One in particular made the usual arguments, to wit, that no one can successfully time the market, that I won’t know when to get back in, that buy and hold has worked over the long haul, and so on, arguments that I have been familiar with and accepted for forty years. And since, according to my calculations, the gains in the stock market since I got out plus dividends I would have received amount to an opportunity cost to me of five percent, this financial adviser has been giving me a none too subtle raspberry for the last five months.
Of course, financial advisers are biased. Even if a financial adviser knew that going to cash was the right thing to do, he could never recommend such action to his clients. After about six months to a year of being in cash, receiving a paltry interest rate, which would be more than swallowed up by fees, it would likely occur to a client that if his money is just going to sit there in a money market fund, he doesn’t need a financial adviser at all. Then, after the passage of another six months or so, after the client had moved on to another financial adviser, who would have put him right back into the stock market, suppose that same stock market began a precipitous forty or fifty percent decline. The original financial adviser would finally be vindicated, but it would be too late; for having lost all his clients owing to prudence, however justified, he would have long since had to find another line of work.
For the most part, having your money in the stock market is the right thing to do. Buy and hold, dollar cost averaging, reinvesting dividends—all these things pay off over the long haul. So, financial advisers are basically doing the right thing by keeping their clients in the stock market. But what occurred to me in all this is that what is appropriate for someone who is young or even middle age may be completely inappropriate for someone who is retired. Actually, this is an established principle, which is why people are advised to put increasing amounts of their portfolio in bonds as they age. Would that I could! But the interest on even long term bonds is pretty paltry right now, thanks to all that quantitative easing. Moreover, if interest rates rise, as surely they might, those bonds will lose value, and so there may be just as much risk in ten-year bonds as in the stock market.
The thing is, when I was working for a living, I could regard a decline in the stock market with dispassion. I didn’t need my investments to live on, because I had an income. In fact, I would continue putting my savings into the stock market and reinvesting dividends, because, as they say, the stock market was going on sale. But that is no longer true. Now, I must dip into my savings to fund my retirement. And that creates an uneasy feeling.
My bridge partner has been retired for about a year now, and she is talking about going back to work. It is my impression that she has plenty of money, much more than I do, in fact, but I think I may know the reason. After a lifetime of adding to her savings, she is now bothered by having to make monthly withdrawals from her nest egg. Like me, I am sure she has recalculated her finances to reassure herself that she will have enough money to last the rest of her life, even if she lives to be a hundred-and-three years old. But drawing down on one’s savings is spooky, and she may need the feeling of security that income from employment brings.
The financial adviser who has been giving me raspberry for getting out of the market says that all I need to do is keep five years’ worth of living expenses in cash and invest the rest. That used to be my thinking. And since I retired in 2007, just before the Great Recession, it is well that I observed that rule. But five years is not always enough. Depending on the index you use (Dow Jones 30 or S&P 500) and depending on whether you just look at the nominal values or reinvest dividends and adjust for inflation, if you had money in the stock market in the late 1960s, it would be anywhere from fourteen to twenty years before you broke even. If you had money in the stock market in 1929, it would be somewhere between twenty-five and thirty years before you got your money back. And if you were in the Japanese stock market in 1989, then today, twenty-eight years later, you would still have lost half your money.
Let us be conservative and pick the least amount of time from these three examples, which is fourteen years. That would mean that if I had five years’ worth of living expenses in cash and the rest in the stock market, then after five years I would have to start selling my stocks at depressed prices and continue to do so for the next nine years, almost guaranteeing that I would run out of money, if I lived another twenty or thirty years. And God forbid that a Great Depression or Nikkei scenario of twenty to thirty years of depressed prices should be my fate.
The way I see it, there are three phases to saving and investing. In the beginning, there is the saving phase. For the first few thousand dollars you save, it doesn’t matter what return you get. The important thing is that you are saving the money, even if it just sits in your bank account. The second is the return on investment phase, where the amount of return you get is important in order to benefit from the miracle of compound interest. Third, there is the capital preservation phase, where keeping what you have is more important than getting a return. That is where I am right now. If there is never another recession or bear market in my lifetime, if this bull market goes up and up forever, and if I have to suffer raspberries from that financial adviser every time we play bridge, at least I will not run out of money (barring some catastrophe, like my having a stroke and having to go into a nursing home). But if I got back into the stock market now, and if a bear market like any of the three I mentioned should occur, I would soon be impoverished.
From this I dare to generalize. The baby boomers have had an impact on society and the economy from the time they were born owing to their overwhelming numbers. Of those that are now retired, many of them will be in my shape: maybe a little better, like my bridge partner; maybe a little worse. But they will be as sensitive to and as fearful of running out of money as I am. They may be in the stock market now, desperate for yield, but the need of retired baby boomers to get out of the stock market will be much greater when it starts to go down in a big way than when they were still working for a living and could better stand the declines. In other words, the mega-bear market I fear may be exacerbated by the fact that many baby boomers have so much more to lose by being in the stock market now that they are retired, and thus will be more likely to panic and sell everything as the market descends.
Whenever I read essays on investing, there is often a disclaimer at the end that has something to do with the essay not being advice to invest this way or that. I suppose the purpose of it is to keep the author from being sued. I guess I should do the same. I wrote this essay merely to put my thoughts down on electronic paper and present them to others for their consideration and possible amusement.