The Worst of Times…The Best of Times

March 28th, 2008 at 10:54am Tom Muldowney

  Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF® 

This might be the worst of times for the typical boomer approaching retirement. 

He has a continuing need for stocks because stocks grow.  They do so for a cost…the cost is volatility.  To mitigate the volatility, he should consider including some bonds.  This combination of stocks and bonds is called “allocation” and such a portfolio is usually referred to as a “balanced portfolio.” 

Revenue that can be drawn off a balanced portfolio (stocks and bonds) is usually higher than that which can be drawn off a portfolio of just bonds.  The danger is this…since the stock market is so volatile, many folks will change their allocation to one that is heavier in bonds.  A portfolio that is “just bonds” will probably freeze his income and his assets.   Bonds are the very thing from which the term ‘fixed income’ in retirement comes. 

There is little doubt that everything that anyone will do or will need to purchase in the future will cost more than it does today. Everything from apples to a trip to the zoo will cost more.  This applies to the natural gas to heat his house to the gas that he needs to put in his car. Unless the retiree has financial assets that can grow and spin off sufficient cash flow, the only year in which a retiree will have enough retirement cash flow will be year number one.  After that, for every single year of his retirement, his purchasing power will go down, owing it mostly to inflation. 

Bonds suffer a second drawback.  Everyone who borrows (a bond issue is the ultimate borrowing) will refinance if interest rates drop. This will cause bonds to deliver even less cash flow to the retiree.  It is no wonder that so many households have been forced to consider the slow motion sale of their home in the form of a ‘reverse mortgage.’ 

This is toughest on the near term retirees because it will jade their perspective on stocks and do so, possibly, for the rest of their lives.   That, by itself, may cause many “boomers” to make a decision that will move them toward bonds and thus set off the long slide to loss of purchase power.   

The solution requires doing exactly the opposite of that which feels safe. Stocks have clearly been hammered lately but stocks are the heart that drives the pulse of the world’s economy.  Stocks represent ownership and employment in the thousands of companies over the entire economic world.  Stocks represent how you and I (we are the market) view the future economy.  When stocks have low valuations (market is down) it represents that we, the owners of those companies think that the near term future is troubled.  Often this only reflects the next several months!  The long term is not only positive, but remarkably positive.   It seems counterintuitive, but when stocks are down, it means that the costs of the assets that will produce your future income stream, your future income stream, are “on sale.” 

So, where do you go from here?  The answer is unpopular but direct - you should ‘stay the course!” and  maintain your balanced stock/bond portfolio.  This will help you preserve your long term retirement security and may be the very thing that keeps you in your house.  Doing so may give you peace of mind to enjoy…“the best of times.”

Entry Filed under: Financial Planning, Investments