In late August the S&P 500 stock index hit 2000 for the first time ever. It took roughly 16 years to go from 1000 to 2000. In between we had the dot.com market implosion of 2002 and the credit crisis crash of 2008. Memories of jarring stock market declines continue to give investors in or planning for retirement the willies every time the press trumpets a new high on a widely-watched market index. The question from the wife was typical of financial acrophobia—fear of heights. In their early 50s, she and her spouse are building respectable 401 (K) balances. What if there was another 2008 and they wouldn’t have enough time to recover as they approach retirement at some point? With everything going on in the world, she wondered, “Should we be worried? What are the options in our 401(K) plan?” Like most retirement plan menus, several bond funds were offered. Bond funds do well when interest rates are falling as bond values move inversely to interest rates. Everyone agrees, eventually the Federal Reserve Bank, if not the “bond vigilantes,” will force a rise in interest rates. So bond funds in general are not a solution for the truly risk averse. For long term growth of capital, short-term bond funds or stable value funds, such as the one available in the couple’s plan, are not an answer due to historically low yields. All one can do with savings, after payment of taxes, is to spend it or give it away during life or at death. The purpose of retirement savings primarily is future spending power when employment income ends. There’s the rub. The stable value fund in their plan, tied to 3-month Treasury bills as a benchmark, had a very low yield. The trailing 1-year return is 0.88%— less than one percent. With inflation running over 2% annually and future taxes to be paid when the money is withdrawn, the return is negative on a real return basis. A stable value fund guarantees a loss of future buying power—a questionable formula for a secure retirement! In their early 50s and owners of a business, “retirement” is a bit far off, at least 15 to 20 years out. Nick Murray, a widely-published financial strategist said recently, “ If you think the market is ‘too high,’ wait until you see it 20 years from now!” When you retire, you do not cash out all of your savings at one time. You withdraw funds as needed over a long period. Between now and retirement, build sufficient cash reserves and balances in diversifying alternative investments that would allow you to ride out periodic dips in the stock market. Our couple wisely decided to stop worrying about trying to time the market and to keep dollar-costaveraging new contributions to their account, benefitting from periodic\ “sales” in stock values. About that new high. At any given time during a season, the outdoor temperature may hit a new high…or a new low. The event is meaningless as we know that a new high or low could occur at any time going forward. Where the temperature goes between high and low points is anyone’s guess. Same with markets. S&P 500 at 2000 tells you little about the future. Currently Japan is sinking. Are big money players going to invest in yen-based investments? Unlikely. Outside of the U.K., which survived the vote on Scottish succession, Europe continues weak. With an aggressive European Central Bank stimulating economies, Europe is several years behind the U.S. in the recovery cycle, which can present bargains for sharpeyed money managers. The U.S. dollar has strengthened against the euro and every time willies kick up over global turmoil, money flows into the dollar, restraining interest rates. U.S. growth remains tepid but it is growth! A 4th-quarter bump in domestic stock prices cannot be ruled out. Sir John Templeton said, “Bullmarkets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” We seem to be a bit short on optimism and euphoria is nowhere in sight. Investor worries may be taken as a positive indicator!
-The Investment Coach 1994, Lewis Walker is President of Walker Capital Management, LLC.