Retirement plans too risky?

[Robert8]

Really Good Advice from Ferri and Siegel

To say that many of our fellow citizens are not prepared for their retirement future reminds me of a conversation that I had about 3 months ago with a neighbor of mine. This fellow is an attorney in private practice and on the subject of investing for retirement he advised me that almost all of his retirement savings were in a bond fund with Merrel Lynch.

I started talking about asset allocation, time horizon, S/D and risk/reward, indexing etc. He was speechless. It turns out that he had never heard of these terms nor these concepts. A 45 year old lawyer!

I suggested that he pick up Boglehead Guide to Investing and bone up on a few of the basics.

I saw him about a month later and he said that he had read the book twice and was embarrassed at how ignorant he was on the subject. He is now on to bigger things~Bogle, Brenstein, Siegel, Graham, Swedroe, Ferri etc.

I'll bet that attorney neighbor today couldn't be more pleased with that Ferri asset allocation advice in mid 2007 to move from nearly all bonds to 80/20 (stocks/bonds) since diversification thru index equity funds globally made it all safe.

 

[W2R]

I'll bet that attorney neighbor today couldn't be more pleased with that Ferri asset allocation advice in mid 2007 to move from nearly all bonds to 80/20 (stocks/bonds) since diversification thru index equity funds globally made it all safe.

I couldn't be more pleased with Ferri's asset allocation advice in his 2006 book, All About Asset Allocation, in which he states:

At its core, asset allocation is a three-step process:

1. Determine the portfolio's overall equity and fixed-income mix based on an investor's needs and tolerance for financial risk.

2. Develop a portfolio of fundamentally different investments that are expected to have a low correlation with one another and are expected to deliver a fair rate of return given each investment's inherent risk.

3. Rebalance the investments annually to control overall portfolio risk and increase long-term return.

(pp. 73-74, emphases mine)

I found Rick Ferri's book to be one of the most helpful to me and I would recommend it to anyone as one of the best available.

Apparently you have a beef with something you heard somewhere but it's not clear where, or what caused you to dredge up this old thread.

 

[Robert8]

I have a beef with the hubris on the thread. If you actually read the original linked article it sounds very reasonable in its concerns about the riskiness of individuals investing on their own in DC plans and yet many of the responses were mocking of the articles concerns.Many posters were so certain that they could invest wisely on their own in mainly equities and that stock investing would do very well for them in the long run.

The one poster claims his neighbor the attorney in 2007 shouldn't have been mainly in bonds - that was ignorance on the part of the lawyer. No, that attorney needed to be mainly in well diversified stocks and the poster set the attorney straight.

It's hard to say whether the attorney should have been mainly in stocks or bonds, but the attitude that he was grossly ignorant about investing compared to a person who has read a Ferri or Seigel book that advises that long term investors, who believe apriori that they are risk tolerant, should be mainly in stocks, because in the LR stocks are nearly a sure thing, is certainly an ignorant point of view.

You apparently disagree with that, so we will have to agree to disagree.

 

[W2R]

I have a beef with the hubris on the thread.

Well, thank you for providing us with an example!

If you actually read the original linked article it sounds very reasonable and yet nearly all the responses were mocking. Nearly every poster was so sure they could invest wisely on their own in mainly equities and that stock investing would do very well in the long run.

I didn't see anything nearly as unreasonable in this ancient thread you dredged up, as was your comment.

The one poster claims his neighbor the attorney in 2007 shouldn't have been mainly in bonds - that was ignorance on the part of the lawyer. No, that attorney needed to be mainly in well diversified stocks and the poster set the attorney straight.

You didn't provide a quote, but I believe the quote from that poster to which you are referring is,

This fellow is an attorney in private practice and on the subject of investing for retirement he advised me that almost all of his retirement savings were in a bond fund with Merrel Lynch.

I started talking about asset allocation, time horizon, S/D and risk/reward, indexing etc. He was speechless. It turns out that he had never heard of these terms nor these concepts.

Asset allocation, time horizon, and the rest are fundamental concepts of investing. Those who didn't pay any attention to them and, for example, had all their assets in one stock got slaughtered in 2008. We have had several sad and wrenching threads posted by people who didn't diversify and lost their life savings. These concepts don't imply that the attorney should not have been mainly in bonds.

Diversification begins with not putting all your eggs in one basket (in other words, not putting all your investments in closely correlated asset classes). Investors would be best advised not to indulge in that practice.

It's hard to say whether the attorney should have been mainly in stocks or bonds, but the attitude that he was grossly ignorant about investing compared to a person who has read a Ferri or Seigel book.

The authors and books that were cited were standard, recent sources for information on investing. They promote a balance between stocks and bonds that is determined by the risk tolerance of the investor (as I took the trouble to show by typing in paragraphs from Ferri's book in my above post, for example). If the attorney hadn't even heard of any of them, or of any of the terms or concepts put forth in articles and books about investing, it is pretty shocking. Even if he had someone else managing his accounts, he was not getting the information he needed to understand whether or not his investments were being handled appropriately.

You apparently disagree with that, so we will have to agree to disagree.

I think you dredged up an old thread and started dissing some of the usual investment gurus in order to get a reaction (yawn). I'm going to bed so if you continue I won't be reading it.

 

[Robert8]

I brought this up because I believe the article in the OP has a lot of truth in it. And those truths are a lot easier for people to see now than it was back in 2007. Here are parts of the original article.

Emily K. Kessler's job is all about risk. She's not a stunt double, or a fighter pilot, or even a preschool teacher (think of the germs!). She's an actuary -- she studies risk for a living.

So when Kessler decides something is unduly risky, it's worth listening. Her current concern: retirement plans. Kessler, who works for the Society of Actuaries, wrote the report for a group called Retirement 20/20, a collection of pension and financial experts who took a look at the troubling transformation of our nation's retirement systems.The new emphasis on 401(k) and other retirement savings plans puts too much responsibility on individuals -- creating too much risk of failure...

Under the defined-contribution system, if you guess wrong -- or life goes wrong -- there's no recourse....

And a better system wouldn't expect us to be our own investment managers. Trust me -- The Washington Post would have never hired me to manage its pension funds.

"Why would any reasonable person think that people not trained in investments would be able to make these decisions in a sensible way?" asked 20/20 participant Zvi Bodie, professor of management at Boston University. "I've been teaching investments for 35 years, so to me it's second nature. But let's take an area like medicine.
"Now, I consider myself a reasonably well informed consumer of medical services, but I wouldn't dream of diagnosing my own illnesses . . . even if my doctor said, 'You know, performing minor surgery is really not such a big deal. I can give you the equipment and a brochure, and you can take care of it on your own.' That's what we're doing now with 401(k) plans."

 

[sindy9001]

Thank you , Robert. I just looking for it.

 

[TromboneAl]

many of the responses were mocking of the articles

This is what we do here.

 

[deserat]

I've bet my retirement on that assumption, as have many others. The risk is that we're wrong, but unless I find a better alternative, I have to remain in the market. By the way, the GAO agrees with you. Here is their report, written for the ultimate reading-challenged bureaucrat who only has time to read the title:

BABY BOOM GENERATION: Retirement of Baby Boomers Is Unlikely to Precipitate Dramatic Decline in Market Returns, but Broader Risks Threaten Retirement Security

The "but" is summed up in the following paragraph:

"While the boomers’ retirement is not likely to cause a sharp and sudden
decline in asset prices, the retirement security of boomers and others will
likely depend more on individual savings and returns on such savings. This is
due, in part, to the decline in traditional pensions that provide guaranteed
retirement income and the rise in account-based defined contribution plans.
Also, fiscal uncertainties surrounding Social Security and rising health care
costs will ultimately place more personal responsibility for retirement saving
on individuals. Given the need for individuals to save and manage their
savings, financial literacy will play an important role in helping boomers and
future generations achieve a secure retirement."

http://www.gao.gov/new.items/d06718.pdf

Interesting - that was a 2006 document - based on what has happened in the last 6 months or so along with what is being proposed, I would say the assumptions regarding this report are now moot. I've come to conclusion there is either a concerted effort or half-concerted effort to bring down the private means for retirement and have it be fully replaced with a government-run one ala similar to social security. If the private wealth is decimated and then taxes are raised to provide for the new basket of services being provided by the government, then we need to work longer as well as depend more on the government for our retirement well-being. Remember all of the fights over the 'privatization of social security' awhile ago? Isn't this the best way to seriously put any idea like that to bed? I mean if the market can't 'protect' those 401Ks/403Bs, then it certainly can't protect social security, so we need another mechanism to 'protect' the people and their retirements.

Lastly, there was an interesting post made regarding lifestyle in Europe - yes, socialism can be lulling, however, the comment made that all of one's income is taken up with 'surviving' and it is difficult to 'save a bit extra', leading one to rely upon the government for all services. It is difficult to break out of that continued existence.....I see that as very true - I live over here in Germany and one sees the lulling effect.

 

[tuixiu]

I've gone pretty far with self surgery, mainly removing foreign objects from fingers and feet. It probably results in more pain and collateral damage than if I went to a doctor but definitely cheaper.

 

[Bikerdude]

Interesting - that was a 2006 document - based on what has happened in the last 6 months or so along with what is being proposed, I would say the assumptions regarding this report are now moot. I've come to conclusion there is either a concerted effort or half-concerted effort to bring down the private means for retirement and have it be fully replaced with a government-run one ala similar to social security. If the private wealth is decimated and then taxes are raised to provide for the new basket of services being provided by the government, then we need to work longer as well as depend more on the government for our retirement well-being. Remember all of the fights over the 'privatization of social security' awhile ago? Isn't this the best way to seriously put any idea like that to bed? I mean if the market can't 'protect' those 401Ks/403Bs, then it certainly can't protect social security, so we need another mechanism to 'protect' the people and their retirements.

Lastly, there was an interesting post made regarding lifestyle in Europe - yes, socialism can be lulling, however, the comment made that all of one's income is taken up with 'surviving' and it is difficult to 'save a bit extra', leading one to rely upon the government for all services. It is difficult to break out of that continued existence.....I see that as very true - I live over here in Germany and one sees the lulling effect.

Excellent! we have just solved the SS and medicare problem. Baby boomers need to work until they die. Brilliant.