"And whether or not it is clear to you, no doubt the universe is unfolding as it should." (Desiderata). If you haven't read this poem, do so. It is telling us that as a product of nature, what we are going through (and will go through) is a part of nature's ebbing and waning. The pendulum swinging both ways.
I have been asked "what about my 401k and IRA? How can I make them safer?" Let's start with some more history. As unions became stronger, part of their negotiating besides wages was a pension. The first one started way back in 1835! Basically, the money in a pension was put aside in a separate account that the employee would have access to at retirement. The first ones guaranteed a certain amount of money per month for the rest of the employee's life. This is known as a traditional pension plan. The money was invested and for the most part, continued to grow as the stock market grew. The problem with the traditional pension plan is the employer was responsible for assuring the money in the plan was enough to pay for each retired employee. When the stock market took a downturn, the employer had to make up the difference if the plan suffered a loss.
So in 1978, the U.S. government, being made aware of this problem, allowed companies to continue their traditional pension plan or switch to a 401k plan which made the employee responsible for his/her investing decisions taking the onus (and liability) off the employer! So any losses in the 401k plan is suffered by the employee not the employer. (ebri.org) Sneaky eh?
Then came the Individual Retirement Account (IRA) in 1981(Financial Ducks in a Row). The government saw that retirees were not saving enough for their retirement. They made it advantageous tax-wise for individuals to put away money that would be taxed at a lower rate once the individual retired at a lower income level. This did not mean that future retirees ran out and started to invest for their retirement. In fact, the savings rate of individuals went down (Cheat Sheet):
So let's start with the 401k. This is normally set up by the employer and an investment company that collects the money and puts it into an investment of your choice. The problem is, there are very few SAFE choices in many accounts. You get a choice of stocks, bonds, stocks and bonds or sometimes if you are lucky, an "interest accumulation" account. The safest obviously is the last one. But it's not paying any interest, you say. Well, would you rather gamble with the stock market or play it safe? I also get asked from younger investors "but if the stock market goes down, there's lots of time for it to go back up again!" Let's look at how well investors actually do.
Here is a chart of the S&P 500 Index. At the bottom is a chart of the AAII Bullish Consensus. A company calls a bunch of investors every week and asks them "Are you bullish or bearish the stock market today?" A percentage of bulls and bears is recorded and graphed. The theory is that if you are bullish then you buy stocks. If you are bearish you sell stocks. It has to do with the emotions greed and fear. If you are bullish, greed is the norm. If you are bearish, fear is. There's an axiom "buy low and sell high". Well according to this chart, most investors "buy high (greed) and sell low (fear), thus doing the exact opposite of how to make money in the stock market! And when average Joe investors are buying at the top, who do you think is selling their stock to them? The smart ones of course!
Of course the other alternative is "unless you are a professional gambler, why gamble with your money at all?" So the alternative is to put your money in a safe alternative, the interest accumulation account. Trust me, you'll sleep better at night!
As for your IRA, you are a lot more flexible. The government allows you to set up your portfolio with very few restrictions. But for the most of you, again if you want to sleep at night (remember reading your IRA statements during the 2008 downturn?) you can invest your money in safe alternatives. What do you suppose is the safest place to put your money? The good old U.S. of A. government funds! But there is a caveat here. As mentioned previously, I expect that long term interest rates will go up as things deteriorate. Which decreases the value of long term bonds, even government ones. So the best place to put your money is in short term government bonds. There are a number of Mutual Fund companies that have that option, Vanguard, JP Morgan, and T Row Price to name a few. If you can't depend on the U.S. government remaining solvent, we're really in deep doo doo! It is easy to set up an account and have your IRA money directly transferred to the new account.
Sleep well, my friends!
Next we'll discuss the effect of bull and bear markets on social norms such as fashions and music, etc. Think about the Monkees and Black Sabbath! Fascinating stuff!
Best regards,
Ken Knight
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