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BHC Marketing: Consumer Insights
"Making Your Lifetime Retirement Income Certain"
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For Immediate Release
Houston, Texas
“It’s best to leave stocks alone to recover from the loss and to draw instead on the fixed-income (bond) portion of your portfolio.” Katherine Reynolds Lewis, Bankrate, Inc., August 11, 2011
The above “conventional wisdom” is based on two assumptions: (1) stocks will recover and (2) bonds are immune to losses. If your retirement money is in both stocks (including mutual funds) and bonds and you have losses in your stocks, you’re advised to sell bonds in your portfolio to give your stocks time to recover.
Can stocks and bonds lose value simultaneously? They most certainly can as a cursory review of history reveals. Also, how do you know stocks will recover? Currently the Dow Jones Industrial Average (“DJIA”), a closely followed index that measures movements in the stock market, is at the same level as mid-1999. That’s 12 years without gains and that’s before we take inflation into account. If adjustment for inflation were made, the DJIA would be much lower today than it was in 1999. Twelve years is roughly one-half of a typical retirement and too long for most retirees to wait in hopes that stocks will recover.
Unfortunately there is no market strategy that guarantees you’ll not run out of money before retirement ends. Sadly, many retirees cannot afford the risks of the market, yet that is exactly where they have their retirement savings. Obviously they’ve not taken a stroll back through the years since 1999 and reviewed what happened. From January 2000 until October 2002 the market fell 38% in response to the dot.com bust and did not recover to the 2000 level until October 2006 – over six and a half years later. After the market matched the 2000 peak it continued to rise until October 2007. It then went into a tailspin loss of 54% in response to the housing bubble before bottoming out in March 2009. Since then, it has been extremely volatile and is currently far below the previous peak in 2007.
Where will stocks go from here? We are currently enduring an extremely volatile market along with an uncertain economic future. It seems prudent to believe that lower stocks are possible. How about bonds? Bonds fall in value when interest rates rise. It is anyone’s guess which way rates are headed but they can’t go much lower. Loose fiscal policy during and after the Great Recession does not augur well for falling rates, should the economy recover. Therefore, hope for the best, but prepare for the worst.
If your retirement money is in the market – stocks, mutual funds, variable annuities and/or bonds – ask yourself this question: can I afford losses? If the answer is NO then you may want to reconsider where your retirement money is kept. Ask your financial advisor to tell you about safe money options that provide a lifetime income regardless of what happens to markets and rates. This is where some of your retirement money may need to be.
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Shelby J. Smith, Ph.D.
September 2011
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