With financial markets shaky, it may be time to reconsider those rules-of-thumb about retirement plans.
It is not hyperbole to say that last week in the financial markets was the worst I've witnessed in my lifetime.
Some of the nation's largest and oldest financial institutions crumbled or disappeared right before our eyes. Money-market mutual funds, long viewed as one of the safest types of investments, became as risky as stocks for a bit. And the stock market was as volatile as it's ever been.
Everywhere I went people asked the same question: "What should I do now?" Well, there's no easy answer to that except to say, "don't panic."
Some years ago, after the crash of 1987, I had the good fortune to interview Winslow Webber, a stockbroker who worked for David L. Babson during the crash of 1929 and was still working in the business as a "customer's man" 58 years later when the next big crash came along.
"These things go in cycles," he told me when I asked for his advice in the wake of that stock market crash two decades ago. Well, that much is true. These things do go in cycles. But that may not provide much comfort to those who have watched their retirement portfolios, even their well-diversified portfolios, decline by 30 percent since October.
So, besides not panicking, the second thing you can do is this. Every calamity creates an opportunity to revisit your investment plan. (Of course, if you don't have an investment plan, the past week's events should help inspire even the worst of procrastinators into action.)
For those who have a time horizon of five years or more, it's quite possible that you don't have to change a thing. Your standard 60 percent stocks and 40 percent bonds portfolio was built, presumably, to withstand this sort of volatility and bounce back some years later. For those who need to tap into their nest egg within five years, it's possible that you may not have to change anything either, especially when you factor in how long the portfolio has to last.
Of course, that's easier said done. It may also be completely wrong to suggest. (Memo to malpractice lawyers: Here's your next new area of business to chase.) Yes, the build-a-standard portfolio, steady-as-she-goes advice may no longer be the best approach. Consider these cold, hard facts: It might take a little more than 10 years for a standard 60 percent stocks/40 percent bonds portfolio to recoup a 10 percent drop in value, 15.2 years to recoup a 20 percent decline and nearly 20 years to recover from 30 percent decline.
That suggests that doing nothing — even if you have a so-called time-tested investment plan — doesn't seem right given all the new research about retirement and all the new investment and insurance products on the market right now. Doctors no longer treat high blood pressure the same way they did in the 1960s. Yet, that's what investors are seemingly doing today. They are using the tools and techniques of a bygone era to deal with today's illnesses.
Well, much has changed since modern portfolio theory was modern. Today, investors need to think about all their forms of capital (financial, human and social) as they build their retirement plans. Today, they need to think not only about investing and efficient frontiers, but about reducing, transferring and mitigating the risks of retirement in ways previous generations never had to contemplate.
Last week's events have taught us, if nothing else, about the need to create guarantees, about the need to create a personalized defined benefit plan instead of an undefined benefit plan (which is what we get with 401(k) plans today).
For instance, Zvi Bodie, a Boston University professor and author of "Worry-Free Investing," suggests investing first and foremost in safe investments designed to guarantee an income stream in retirement. He recommends buying Treasury Inflation Protected Securities (TIPS) to cover fixed expenses in retirement and then taking calculated risks in the financial markets, using convertible bonds, principal-protected equity participation notes and the like, to pay for discretionary expenses in retirement. Visit this site to learn more about Bodie's book.
For those already in retirement, Bodie recommends the use of inflation-protected single premium immediate annuities or SPIAs. See this site for more information on SPIAs.
Last week's events have also taught us about the need to look beyond asset allocation to something that York University Professor Moshe Milevsky calls "product allocation." Milevsky suggests investing in a mix of assets and insurance products (stocks and bonds, variable annuities with guarantees, and lifetime payout income annuities) as a way to create income in retirement.
To be sure, Bodie and Milevsky use different tactics to achieve their results. But neither approach is "more of the same." Both are prescribing medicine to cure what ails us today. And this much is certain: Anyone who invested using either Milevsky's or Bodie's approach was less anxious last week than those with a standard 60/40 portfolio.
So what should you do? Surely, don't panic. But do re-evaluate and re-jigger your investment plan. Do consider shifting assets into guaranteed investments and other types of investment and insurance products that reduce the risks of retirement. And do consider talking to a financial professional who has the knowledge and experience that this new world order requires.
These things may go in cycles as Winslow Webber once said, but they don't have to leave your nest egg spinning out of control.
Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.