 |
|
 |
|
 |
|
 |
|||||||||||||||||||||
|
At the time, little did I realize that systematic investing — a bedrock characteristic for a retirement-savings strategy — suffered the most when stock prices rose. So, even though those smiling faces reflected confidence in the short-term results of their modest retirement portfolios, the truth was that, for those nascent investors, the bull market wasn't that good for their long-term retirement goals. On the contrary, today's down stock market is a boon to those young individuals who want to invest in equities to build wealth for retirement. For today's retirement savers, the stock-market decline provides the opportunity to buy more shares of a company or more shares in a mutual fund for the same dollar contribution to their retirement plan. These buying opportunities — equivalent to price reductions during retail sales events — happen quite often on a stock-by-stock basis, and somewhat less frequently with industries and sectors. Every once in a while the overall stock market falls prey to a series of events that depress the entire market, events that provide investors who don't follow the herd with a unique buying opportunity. Over the past thirty years, there really have been three major buying opportunities: mid 1974, October 1998, and the current market. Obviously, there are some important caveats to this opportunistic buying strategy. First of all, a portfolio should be broadly diversified so that specific events that undermine the market don't overly affect individual companies that go bankrupt and never recover. In today's environment, major companies such as Enron and WorldCom have deserted their stockholders forever by falling into bankruptcy. Investing in well-diversified mutual funds usually minimizes this risk. Second, the investor must recognize that a strategy that buys low and sells high is usually one that is bucking the trend. So, when TV commentators and Wall Street gurus are touting a 10,000 Dow Jones and your barber is telling you how to buy stocks, that's the time when alternative investment options should be considered. Similarly, when the media is getting lessons from Al Michaels, the commentator for Monday Night Football, about how successful he is at shorting stocks, that's the time to be more aggressive about owning equities. However, by its very nature, a systematic investment program does all this for investors. When the stock market is high, contributions buy fewer shares and when the stock market is low, contributions by more shares. There is virtually no way of knowing how far the current market decline will go or how long it will last. The history of the stock market teaches us that the decline will end and that the diversified equity investments will, once again, provide the medium for building wealth. Retirement investors systematically invest a fixed portion of their income by having a specific amount deducted from their paycheck to invest in the stock market. This timeless strategy allows for the accumulation of stock during the early years when price weakness or bear markets can increase holdings of stocks that have declined in price. As time passes and wealth is accumulated, the strategy changes to gradually reduce the risk of volatility by banking some of those gains in a mix of bonds and stocks as retirement approaches. Gradually the allocation among different types of assets should change, e.g., the mix between bonds and stocks should be consistent with your total wealth, investment time horizon, and current stock-market conditions. Recent articles in major newspapers tell of older workers who have ignored these basic rules. Individuals who were planning to retire in less than 5 years had retirement portfolios that were not only invested in all aggressive growth stocks or similarly structured mutual funds, but were heavily concentrated in only one or two stocks. While this strategy might provide higher long-term returns, the near-term price volatility of the stock market and the risk of minimal diversification will quickly shorten investors' time horizons. Similarly, the media's ability to stir up panic and fear during stock-market declines undermines the investment strategy of younger workers. As a result of front-page stories on the stock-market decline — and the purported safety of the bond market — many workers have shifted assets from stocks to bonds. The result can be a portfolio of bonds yielding no more than 3-4% after fees, a rate of return that is unlikely to build sufficient wealth for retirement. Bonds should be used to conserve capital in a portfolio that is being used to distribute income to retirees. They should not be used as the basis for an investment strategy for younger workers who are saving for retirement. Employees who contribute regularly to their retirement-savings plan can benefit from an investment strategy that focuses on broad diversification, proper monitoring, and an understanding that stock-market declines offer one of the best opportunities to build wealth for retirement. |
|
|
|
|||||||||||||||||
|
|
|||||||||||||||||||||
<% dim printurl
printurl = Request.ServerVariables("URL")%>
uring
the late 1990s I had the opportunity to deliver presentations to young
workers who were just beginning to save for retirement. Each November,
I would marvel at the appreciation of the stock market and all those smiling
faces of prospective retirees in the crowd. They thought I was some kind
of guru in guiding them toward buying equities for the long-term.
