Neoneocon’s handy guide to investing for the mature set
Here’s a SmartMoney piece on how financial planning for one’s retirement years isn’t the science it was once cracked up to be.
Well, surprise surprise—not! Even I, no financial wizard, could have told you that. But that doesn’t mean I didn’t fall prey to the planner’s charms. And that makes sense, too I suppose: one has to make decisions in an unpredictable world, and it’s reassuring to think that someone is an expert in knowing the unknowable.
My financial history until recently had always been quite simple (in every sense of the word): defer to the advice and counsel of others. My own instincts were to be low-risk: if I’d had my way, none of my money would ever have been invested in the stock market, but in much more conservative holdings instead.
This notion of mine hardly even qualified for the dignity of the term “investment philosophy;” it was more a kneejerk reflection of the monetary habits of my extremely frugal and Depression-raised mother, who had always refused to touch anything connected with the stock market.
I was married for most of my adult life, however, and part of a pooled pair. As such, I decided to let my husband handle the investments. That suited both of us quite well, since he seemed to be more motivated, interested, and knowledgeable about those things. That he was also less risk-aversive didn’t bother me, because during the many years we were married we rode the stock market up and down but mostly up. His decisions had made more money for us than mine would have. I never once thought “oh, if only I’d been investing the money, how much better off we’d have been!”
By the time we got divorced a couple of years ago, there was a certain modest but not insubstantial sum that was now officially Mine rather than Ours, and for which I had to make my own decisions. My gut instinct was to revert to my gut instinct (especially now that I was older)—buy some CDs and municipal bonds and call it a day.
But I hardly had the courage of my convictions; I had seen how the strategies of others had paid off much better than mine. The financial adviser I consulted was, not surprisingly, of a less conservative mindset than I. He said I should get into the market in a way that allowed me to take advantage of what he called “growth;” diversification would protect me.
And so it was that I listened to him, and wound up doing exactly and precisely what one isn’t supposed to do: buying high, at what in retrospect was virtually the peak of the bull market.
So far, at least, I’ve managed to resist the other side of the coin: I haven’t sold low. I haven’t sold at all, actually, just watched the value of my assets sink like a stone, in a way that my adviser had never even suggested was a remote possibility, and yet which—thanks to my mother—I always knew in my heart of hearts and brain of brains could occur (and, by the way, the adviser isn’t doing much suggesting of anything any more).
And that is why the message of articles such as the one in SmartMoney with which I began this essay no longer surprise me. The surprise is that anyone ever thought there would be a way to know the future, or that stocks would be a good idea for investing the bulk of the holdings of someone nearing retirement age who doesn’t have a huge nest-egg.
My new financial strategy is to listen politely to what people recommend, but with great skepticism (so if you want to take my advice you won’t take my advice, if you know what I mean). But for what it’s worth, here are its basic principles (this applies to the investor of a certain age; the rules would be somewhat different for the young):
(1) Buy low and sell high is the laudable goal. The trouble is that it’s extremely hard to tell when these high and low points are actually occurring. Is it just a temporary downturn, for example, or the beginning of a huge drop? Nobody knows, and anyone who tells you they do is telling you a lie. Therefore…
(2) Don’t invest any money in the stock market that you’re not willing to lose. The stock market is not a bank giving a predictable rate of return, even in times when it appears to resemble one. And furthermore…
(3) When you do invest, do so relatively short term. I’m not suggesting day-trading, but set a point ahead of time at which you will take profits and/or cut losses. And then (and this is the hard part, folks) do so.
(4) Don’t look back at all. Made a mistake? Fine—you and a gazillion others, including your financial adviser. Made some money? That’s nice, but don’t think it means you’re a wizard. Probably you just got lucky that time.
(5) If you must hire a financial adviser, get an elderly one, with sufficient memory of the past and some idea of the fact that these things run in cycles, up and down and up and down, and that when a particular portion of the cycle looks as though it will last forever it is always an illusion.
Now take two aspirin and don’t call me in the morning.
Neo,
That’s very good advice.
Now, taking your advice, I won’t take it.
😉
No, on second thought, I will. Take it, I mean.
Jamie Irons
My husband holds several securities licenses, which he maintains, even though he is now in another profession. A year before the meltdown, he made major re-allotment of our retirement investments, which have ameliorated our loses. Over the years, several of his work colleagues have tried to cadge free advice from him on their investments. When pressured, he will tell them in general terms what he is doing with our money. After these exchanges these colleagues have gone to their “professional” advisers, who invariably said my husband’s course of action was dumb. To a person, these people have lost Big Time. But at a party Saturday night, one such person was still spouting the “wisdom” of her financial adviser. Funny.
wow Jamie Irons… what a difficult decision.
The unfortunate part of accumulating a nest egg is that when the unthinkable happens there is no safe harbor. If the “wheels come off” politically all bets are off. Just ask people from other countries where the government has gotten out of hand and all the rules change quickly. The only safety is your own self image and ability to fend for yourself. Stay flexible and expect the unexpected.
Personel question neo; did your marriage fail in part due to your political conversion? Seems to me that it would be hard for someone, a leftist in particular, to deal with his wife converting to conservatism.
My family has had a farm in Stoddard Co. Missouri since the 1880’s. That farm with corn, soy beans and the land itself, has in the long term out performed any other type of investment I have ever been involved with. And I’m in the oil business…it’s better than oil too.
Neo,
I have just one word for you
“Plastics”
I was spared from falling stock blues as a benefit of being recently divorced.
Well, dont sell now. You’ll just get wiped out again by inflation. At least the market with do better with that than bonds and CDs…
Especially for younger people I wouldn’t advise number 3 – you invest for the long term. Indeed, with that in mind realize that if you made a 20 year investment chances are this is going to be a blip.
Now, if you are 67 I wouldn’t be doing a whole 20 year investment cycle (though I would suggest you do *some* given that many people live into their 80’s nowadays) yet even at 55-60 you have enough time to get it back.
And, as one other said even if you go with “safe” investments you can still loose a bundle and wish you had put it some place else. Indeed, there is nothing truly safe in life – and that includes living. Probably the safest investment is land, but even then if you did unsecured 120% loans we see how well that works – yet if you pay what you should land is almost always a good, if normally a very slow earning, investment.
My main advice is don’t worry about it, leave it in there for the long run, and do not go too risky. Other than the long term thing pretty much the same as yours. I’ve lost pretty much back down to what I put in it, but I tried to keep it diversified in terms of risk, not in terms of who I had my money with (which is how most saw diversification).
I must agree with strcpy. For us young’uns, long-term is the way to go. In fact, now it now even a bad time ot buy in, although I’d still wait a year for things to settle out. In the long haul, investment is not hard. It’s when you want short-term that things get messy. You are correct, neo, in that timespan.
Neo,
If you are strongly risk-averse you should never venture into equity investments. For you, preservation of capital is paramount. You are psychologically ill-disposed towards equity investing. Keep in mind, however, that there are other kinds of risks that being ultra-conservative exposes you to: the erosion of the purchasing power of your money. As long as you are o.k. with that. Everyone, regardless of their profile, faces a trade off.
I am more aggressive in my investing profile. I know that bear markets happen and that you cannot always avoid them. Most bear markets were preceded by the Fed tightening the money supply. This bear market was not in that pattern. Yes, my portfolio is down 50%. It’s not easy to stomach that, but I have a very long time horizon and I continue to dollar cost average. Why? The people who benefited most from the Bull Market of the Eighties were those who had bought during the 1970’s. It is not possible to call the exact turning points or the bottoms and tops much of the time. But it is possible to buy good stuff that you understand at bargain prices.
I still follow the principles that Peter Lynch outlined in his book, “One Up On Wall Street.”
The reason why I counsel Neoneocon to hew to her psychological instincts is because emotions are a huge factor in how people invest. You have to be comfortable with what you are doing, as long as you know what the consequences are.
I’m not an investment adviser. I only do equities research and I am not licensed to give investment advice to the public. But if I were working as an adviser I would track people more closely to their psychological profiles. Certainly, I would educate them about their choices. Overall, I would try to function more as a teacher and a coach. But I would want them in control of what they do and understand fully their own decisions.
I still find it morally bankrupt to “make” money off of interest in the first place, as it runs contrary to the notion of an honest day’s work for an honest day’s pay. Interest is also inherently inflationary and redistributional, from those who have not (those who need loans) to those who have (those who issue loans and who “make” money simply for having it in the first place).
Between that and the obvious fraud inherent in the stock market, I see no good reason to “invest” in anything related to it, long term, short term or otherwise.
This post couldn’t be more timely.
Since the morning I’ve been seating here contemplating a letter to MY financial adviser.
When thinking about investment advisors, I try to see things from their perspective.
The one thing an investment advisor does not want to happen is to steer you far away from the herd. Why? There is safety in that herd for them.
Basically they have to avoid one scenario. That scenario is to be missing out when the market is going up. They are safe when the are:
1) with the herd and wrong on the market
2) with the herd and right on the market
3) against the herd and right on the market
but they are out of business if they’re
4) against the herd and wrong on the market.
FredHjr is correct; emotions play a very big part in monitoring one’s investments.
Neo, there is one important word of advice which doesn’t appear in your column above. Investments should match the goal.
The more immediate the need, the less volatile the principal should be; the price one pays for this security is a lower return. One can make money in equities precisely because they DO fluctuate (both up and down). ALL investments have down phases of one form or another; the only way to survive this is to choose good quality investments and to be able to ride out their respective down phases. Equities (stocks), for example, are best for long term investments. They are more volatile than bonds or, of course CDs, but they do, in the long term, provide better potential growth.
Tesh – but why do you think lending to someone your money is not an honest day’s work? Why a bank, or an individual investor, should should acquire risk without being reimbursed for it? As you can see just from reactions on this post, there are more people who have no idea which investment is less risky – it takes talent, experience, good nose (I’ll translate – a developed sense of knowing which way the wind will blow), and plain hard grind researching the financial vehicles you investing to. It is work not less honest than tending to farm crops.
tesh, most investments don’t make money off “interest” but off risk. If I think that guy Bill down the street who dropped out of Harvard to make computers in his garage makes sense, then fronting hims some money to make and manage a good product might reward my prescience.
Or, if I research a hundred companies, their management teams, their products, and their markets, how is that different from “work?” I think you are describing a feeling of morality rather than a thought.
It’s work learning now to gamble, too. It doesn’t mean that it is actually producing anything of worth.
That should be “learning how” to gamble. It’s also work gambling sufficiently adeptly so as to wind up in the black, especially since the House always games the odds.
Oh, and AVI, the point is that you’re not doing the work of producing anything, Bill the computer guy is producing things. That’s the trouble; you’re siphoning off his productivity in the name of “risk”. You were lucky enough to have money to start with, but you’re profiting off of his work and your luck.
Call it moral feelings, but we’ve seen real problems when everyone is playing the same shell game, and the production of a country slips. Capital shuffling isn’t the same thing as production, and only production is viable long-term.
As always your practicality stands out in a charmingly honest way, I’m infatuated. The only point that I would make about your observations is “when everyone is buying you need to be selling, always, and I mean 99.9% of the time go against the parade. Trust your instincts.
Tesh, you are absolutely worng. You say “Capital shuffling isn’t the same thing as production,” but in fact it is. It is production of a different character.
Let’s take a stock. First, by investing in an Initial Public Offering, the inverstor is providing capital for the business to produce and expand.
Secondly, by purchasing a company’s stock ont he secondary market, (the way most stock is purchased) investors cause the price of the stock to rise. This increase in value is reflected in the increase of the stock of the corporate treasury (called treasury stock) which makes the business, itself, a more valuable economic entitiy. Just as the rise in stock price increases the net worth of the individual investor who owns the stock, it also increases the worth of the company. Thus, it is easier for the company to borrow money for expansion. Think hiring more workers, building more factories (construction jobs, steel production, concrete use), producing more and less expensive products (think increasing the standard of living), etc.
If you want any tangible proof at all, look at what we call poverty in this country. Most, not all, of the people who fall below the national poverty level have cell phones, color tv, ans some even own automobiles. To be poor in the U.S. is still to live better than most of the people in most 3rd world countries across the globe!
The fact is that the the processes which you decry as “unproductive” are at the heart of building a nation with the highest lifestyle in human history.
One further note. By your definition, the arts should cease to exist. If you are concerned about the “obvious fraud” in the stock market, you haven’t seen anything until you take a good look at the art market. Obvious fraud is paying a Sean Penn or a Sylvester Stallone 20 million dollars to star in a film; obvious fraud is paying 34 million dollars for pigments smeared across a canvas; obvious fraud is Leonid Breshnev having an antique auto collection while presiding over a government who’s credo is “from each according to his ability, to each according to his need.”
T, those are paper gains. That’s been the whole point of the recent stock market crash; the valuation of these stocks hasn’t been honestly gauged, and now we’re dealing with reversion to reality. It’s all a confidence game where the party only keeps going on as long as nobody looks too close or asks too many questions. Prices always go up, right?
I’ve not claimed anything about the arts, though, so I’m not sure what you hope to gain by twisting my “definition” to that end. That said, yes, I agree, the examples you cite are definitely broken.
I am almost always contrarian in how I invest. I don’t like crowds, whether it is in investing or in normal traversing in every day life. I shun crowds. They give me the heebeejeebees.
Tesh – you make no sense. I am not in favor of borrowing money to pay for things you want, but sometimes borrowing money is necessary. Who would be able to afford a house if not for a loan – not that many. What if your refrigerator goes out? What if your child needs braces on their teeth.
And I certainly don’t see anything wrong with people charging interest. They are taking a risk but that is not the only reason. You say they are not producing anything but neither does a hotel. All they are doing is providing you a place to stay in return for money. A home loan is basically doing the same thing. If we listened to your reasoning on interest then the hotel should not be able to charge any more than necessary to pay their bills and employees – no profit. But Oh I forgot – there wouldn’t be any hotels because there wouldn’t be any banks to loan people money to build hotels.
Few restaurants
Few Hardware stores
few grocery stores.
Now that being said I actually have a problem with people making money by manipulating currency, or on index funds, etc. Those are things that actually DO NOT produce anything.
Well, thanks. But, that sounds a LOT like Las Vegas investment planning. I do not invest there, either. I am $400 or so ahead there, and I am likely to stay that way. I think stocks sound a little too similar. I’ll stay even. But, and again, thanks.
I should wish you all luck in your trading though. Just because I don’t choose to gamble does not mean I don’t wish you all luck.
No form of investment or saving is totally safe…you can lose to inflation with “safe” bank accounts, CDs, and Treasuries, and you can lose to bankruptcies and defaults with corporate and municipal bonds. And, of course, you can lose big-time with real estate.
I think equities should be part of everyone’s portfolio, but agree that they have been over-emphasized. There are many people who (actually fairly strangely) avoid bonds because they find them difficult to understand. They have their mysteries, but are really simpler in principle than are stocks.
There are people with whom it is pointless to have a discussion. Often these hold the view that everyone is entitled to their own opinion, and their opinions are of a value equal to anyone else’s. But stupid people don’t know they’re stupid, and that stupid opinions generated from ignorance are valueless. Tesh is one of those.
what has driven me crazy is that i solve research problems. a doc asked me to be able to calibrate pippettes faster and more accurately (and cheaper). a week later i had the solution.. its been sitting there… now after 3 years he is realizing that he didnt have the future down pat and maybe he should put a little less time in grants for his boss and more time in something for him.
i have a massively fast and parallel solution to going through terrabytes of unorderd data, which has huge applications. he is hot on it, but has made the mistakes of now putting us in a wait state.
a friend of mine who now has it a bit rough. didnt want to make this machine i worked out. he said there was no market. and i said screw the market your thinking of, my market was archives… anyway, a few years later some researchers bored and with access to machinery, made a machine very similar. i showed him. he saw that the market was to charge them a few grand for each of the more than a million cylinders which they cant play for fear of losing them. since the method was no good for listening directly (play), it didnt have the market he thought (people who collected them and listened to them like him), but it did have a market for the archives who would be happy to wait a day and pay a large sum to get the contents of a tin recording without any fear of damage.
i have notebooks full of stuff, and yet, cant get any going other than when somone pays me to do something for them.
i cant get anyone to see
“There is no security on this earth; there is only opportunity.”
General Douglas MacArthur
i am great at solving these real world puzzles of technology… i cant get teams together so we all can share the fruits. of course everyone thinks its really cool when they see someone else do it years later and they send me an email.
now everyone around asks me what they can do. and all i can think is:
now? not much. a decade or two ago, we could have done this (since X company did it years later). there is no calvary, no rescue party, and its your life. you didnt take it serously enough when it was play play play, nothing i can do now about that now. oh. thanks for taking me down the toilet with you. yeah, i have more stuff, but your not going to help with that either, sooooooo..
what i actually say is:
dont know what to say. things suck…
Tesh Says:
“It’s work learning now to gamble, too. It doesn’t mean that it is actually producing anything of worth.”
You’re closing off opportunities to everyone but entrenched interests who have their own capital.
Re: you won’t loan money to little guys with good ideas… to build their factories and expand their businesses…
That said, your joking with us right? 🙂
“There are many people who (actually fairly strangely) avoid bonds because they find them difficult to understand. They have their mysteries, but are really simpler in principle than are stocks.”
Right now I would not touch any U.S. bonds, since I anticipate some very nasty turns for the dollar in the next five years. If I were expecting a reverse scenario, then bond values would rise, especially if the dollar had strengthened before interest rates were falling. But I expect interest rates to begin climbing in 2010 some time, and most definitely by 2012.
We are about to enter a period of stagflation. It will be Obonga’s and his party’s undoing. I’m sure today Obonga must be feeling particularly flushed with the heady victory of Specter’s defection and no fillibuster to make his day a bad one.
Folks, they have it all and they are going to blow it all. I have seen NOTHING in how they operate that conveys the idea of competence. Chaos comes to mind. And chaos is not the favored context that investors like. In-the-know currency traders and arbitragers like it.
FredHjr…inflation & chaos. In his excellent book on growing up in between-the-wars Germany, Sebastian Haffner described the psychological & cultural effects of the great inflation. For the cautious, the conservative, the traditional savers, there was catastrophe. But many of the young–the risk-takers, the gun-slingers, what we would now call day traders—apparently did quite well for themselves. Haffner believes this situation greatly undercut the authority of the older generation, removing one possible barrier to the spread of Naziism.
Tesh, you wrote “. . . those are paper gains. That’s been the whole point of the recent stock market crash; the valuation of these stocks hasn’t been honestly gauged.”
First, you seem to think that paper gains are somehow less important or valid than tangible goods. So how are you paid for the work you do? In chickens or bags of flour? Do you refuse your paycheck because it’s intangible? This is my point re: the arts. They are totally intangible, too, yet they are hardly invalid and unnecessary. Whether you agree with me or not, the fact that you don’t get that analogy evinces a serious lack of understanding of the contradiction of your own argument.
As for the valuation of stocks not being honestly gauged. That’s nonsense. Their value is gauged by what someone is willing to pay for them; just like Sean Penn’s value is guaged by what someone is willing to pay him to star in a film.
The crash occured because suddenly people wouldn’t or couldn’t pay the going rate. If you were in the market, you agreed to pay a particular price for your investments. You VOLUNTARILY chose to participate.
This happened to oil when it hit $140/barrel and I don’t here you or anyone complaining that oil is now underpriced and gasoline is too cheap! It also happened when gold hit $800 an ounce in the late 1970s; I didn’t here anyone complaining when they could buy gold for $300 at the end of the last century. We are (all of us) hypocrites that only complain about the downside
This crash is neither new or unusual. Such crises in the West started with the insane tulip craze in Holland in the 16th century; last time I looked Holland was still there. In 1999 everyone was agog to pay top dollar for internet companies that had never produced a profit. Their price was high not because they weren’t “honestly guaged” but because in a free market, people were willing to pay that much. You can’t gauge a value any more honestly than that!
Futhermore, if there is any dishonesty at all, it is the result of government interference in the free market. As a reaction to the Enron debacle, congress passed the Sarbanes-Oxley bill. This required an accounting practice called mark-to-market to avoid investments being carried on the books at unrealistically high values. The unintended effect wass that in a declining market, it required institutions to seriously UNDERvalue their asets and appear to be more financially unstable than they actually were. Leave it to congress to always fight the previous war.
Finally, you may be irritated because you’re portfolio lost value (so did mine). If you can’t deal with that, then you shouldn’t be in the market; fixed investments like CDs would be more appropriate for such an investor. Then, however, they complain that the rates are too low. Can’t have it both ways, my friend. Either put up with a stable principal and low rate, or a variable principal with the OPPORTUNITY to make more in one day than a fixed investment will pay in one year. Note that– the opportunity to make. No profit is guaranteed. The choice is yours–can’t get more honest than that!
FredHjr,
I understand your concern. Under the current circumstances you may be correct. Much, however, depends upon what the Fed does to reduce liquidity within the next 18 mos. I would be very concerned if we had to rely on Treasury; I hope that more realistic heads prevail at the Fed.
In either case, I fully expect the current administration to be hoist by its own petard before four years are up. Whether it be fiscal, or a matter of natl security, there is just too much ideological posturing and actual incompetence; just too many opportunities for it NOT to occur.
Nice to blog w/ you again.
I’m still waiting for you to call me, I’ve got a great stock tip for you to invest in its acronym on the big board is AIG. Word is its going to go through the roof!
US Treasuries are today’s bubble. I know FredHjr knows that, but its worth saying so clearly. Inflation is inevitable, so to buy a 10 yr bond yielding
I believe the damage that Obonga and his handlers (oligarchs like Soros and Strong) will do to our economy will be substantial. But, if we reverse course, in stages, beginning in 2010 I believe we can eventually right the ship. But it won’t be easy to do.
Obonga is going to promise a lot of free stuff to the kinds of riffraff who would never, ever vote Republican. Our hope is that some of those “independents” and young voters will have learned their lesson from their mistakes and step up and do the right thing next time.
I most fear two things:
1. Socialized medicine – it really is a scheme for health care rationing.
2. Cap and Trade – it will be the boldest attempt yet to loot this country and lay it low.
“”2. Cap and Trade – it will be the boldest attempt yet to loot this country and lay it low.””
You got that right. A taxing of thin air coming out of thin air.
What kind of person sees this as anything other than energy bills skyrocketing? And the chunk of that extra paid monies going to fund more govt!
Its really incredible to just sit and watch people willingly consider, much less engage in a plan to ensure they have less food on their table in the future.
I was writing to a friend, and i banged this out, and since its generally applicable everywhere, this is as good a place as any to share it.
doesnt matter what the subject was that we were discussing, it generally applies (and i think is revealing).
What does it amount to in ugly terms, not pretty flowery things? Then you will realize the truth, for real pretty flowery things can’t be put into ugly terms the way that ugly things can. Why do you think they forbid negative speech? It’s what reveals truth, like titian violet. The desire to excise the negative terminology does not make the world nice, it just means that you can no longer see the negative since you no longer can think about it coherently.
Don: to answer your question (a bit late)—politics had nothing to do with my divorce. In fact, strangely enough, my husband had a similar “conversion” experience as mine, and in the same direction. That had already happened by the time we got divorced.
That said, I have gotten quite a few emails from people saying that political differences and political changes have strained their marriages.
Neo,
It makes one wonder just how Mary Matalin and James Carville have been able to do it. Breakfast discussions at their home must be interesting!