Fed up with Retirement
Reprinted courtesy of MarketWatch.com.
To read the original article click here.
Sometimes I think it would be fun to be an advice columnist. I’m not sure my advice to the lovelorn would stand up too well, but I could certainly write a weekly column answering questions from investors.
Let’s try out the concept with a couple of representatives examples of mail that I’ve received from readers over the years. We will hear from a guy who’s flummoxed by fear of impending doom. But first, there’s a woman who is finally retired — and unhappy with the result.
Glued to the TV
Last winter my husband and I both retired from our jobs. I thought we would finally have stress-free times together to do the things we planned and saved for over the years. But now on a typical day, my husband is glued to the financial channel on TV for several hours.
He’s stressed about how low interest rates are because we’re living off bonds “that don’t pay anything.” He’s stressed because the Fed might solve that problem and actually raise interest rates (this makes my eyes want to roll). He’s stressed about the debt ceiling, stressed about the money we could lose. Blah, blah blah!
I am sick of hearing about this. The fact is, we have enough money to live comfortably and do the things that are most important to us.
But this stress has made me start wishing my husband would go back to work. That way I’d hear complaints about his boss and the dumb decisions his company is making. I can deal with that stuff better than the economics and politics that my husband wants to talk about now. How can I talk some sense into my husband?
— Fed Up in Fresno
Dear Fed Up:
Your letter points to something that experienced investors know: There’s a big difference between the financial part of investing and the psychological part. If we were rational beings, investing would be much easier. But psychological factors like fear and greed and pride get in the way of making rational decisions.
Unfortunately, your husband seems to have derailed what could be a pleasant retirement. I’m not sure that anyone could “talk some sense” into him if he doesn’t want to change. Perhaps he has a trusted friend who could help him wake up to the effect his behavior is having on your lives.
For you, I can recommend an excellent book I think every investor should read: “Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich” by Jason Zweig. I think you will enjoy reading it, and it will give you some interesting things to discuss with your husband — if you can pry him away from the TV!
Fed Up’s question is about more than the financial news. It’s about the need to plan for retirement; it’s about taking care of precious relationships; it’s about managing emotions; and it’s about the sudden lack of structure that confronts many new retirees. Those are all good topics for future columns.
But let’s move on.
The second question of the day is one that I hear very often in one form or another. Buying and holding will never make sense to people who are obsessed with following the markets and the financial news. For example, “everyone knows” that interest rates have to go up. Trouble is, that statement seemed just as true 15 years ago as it does now.
There are hundreds of variables that drive the market up and down and sideways every business day. The human mind can’t keep track of very many of them simultaneously. A computer could do that, of course. But all the brains and all the computers on Wall Street have so far failed to outsmart the markets.
Most short-term developments turn out to be nothing more than “noise” and hogwash. And too many investors inevitably get caught up in the hogwash backwash. To them, buying and holding will never make sense.
For every move you may be contemplating, there’s somebody who’s ready to tell you what a mistake it will be. Many investors, as a result, are so afraid of doing the wrong thing that they get into deer-in-the-headlights paralysis.
Dear Paul: Thank you for your great work. A question if I may: I’m getting ready to rebalance my investments, which will require me to take some of my equity gains and invest in bond funds. However, I can’t help thinking about the impending bond market upheaval. Should I keep the fixed-income portion of my portfolio in cash until we reach a more favorable interest-rate climate?
— Trustless in Seattle
If I had a dollar for every investor who has been certain that doom was right around the corner, and who was equally certain that things in the markets would soon “settle down,” I’d be a very wealthy guy.
“Impending bond market upheaval” is a marvelous catchall phrase. I think it means approximately this: “I’m pretty sure something is going to happen, but I don’t know what, I don’t know when, I don’t know for how long, and most important I don’t know what I should do because of it.”
I think that translation is a pretty accurate statement.
I can assure you that something WILL happen in the market — and this applies to stocks as well as bonds. It might be really good. It might be really bad. It might be sort of boring.
The trouble is that neither you nor anybody else knows just what that something will be, when it will happen or how long it will last. And if that is the case, how could anybody possibly know what you or I should do because of that very elusive something?
In the face of such profound (and inevitable) ignorance about the future, I think there’s only one right course for a sensible investor to take. You have heard it described before. Are you ready to follow it?
A savvy investor should figure out his needs and objectives, make a sound long-term plan to pursue them, then follow that plan through thick and thin. Notice this doesn’t include trying to anticipate the market. It doesn’t include worrying about your investments. It doesn’t include gluing yourself to the financial news. It doesn’t include trying to outsmart other investors or the Federal Reserve Board.
That’s the long answer to your question, Trustless.
The short answer to your question is no. The fixed-income part of your portfolio should be in short-term or medium-term government bonds. Furthermore, you will never, ever be able to be sure that the market has settled down and reached a favorable interest-rate climate. So don’t waste another ounce of energy waiting for that to happen.
It was fun trying my hand at this, though I fear Dear Abby has little to worry about. So what do you think? Should I keep my day job?
Richard Buck contributed to this article.