I’ve mentioned in several previous posts that the anxiety about 401(k) balances has been largely overstated, in part because of the beneficial effects of ongoing contributions and diversified portfolios. This point has come across as Pollyanna-ish to some of you, a point that I can sympathize with, even though I largely disagree with it.
However, I am no Pollyanna about retirement risks, and want to spend a moment discussing what I view as the most important real risk embedded in your retirement savings account: the possible toxic combination of unemployment and market losses.
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Jeremy Siegel has a recent piece in the Financial Times that restates his view that stocks are the most appropriate investment for investors with a long horizon. I wonder how most of you look at this issue, especially after the recent market gyrations.
Are you still listening to Professor Siegel, or did you shred his book along with your fund statements from last year? I’d love to know how many of you agree with that view, and if your investment strategy reflects it.
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There’s been lots of talk since late last year about the plusses and minuses of financial engineering, including a debate (see blogs by Felix Salmon and Tyler Cowen) about the overall merits of various modern financial innovations. While it’s easy to pick on stuff like “NINJA” loans (No Income, No Job, No Assets) and various mortgage-backed securities as examples of financial innovations that we’d have been better off without, I think it would be foolish to let these mistakes convince us that we’d be better off going back to the barter system.
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Criticism of target-date funds is heating up in the aftermath of hearings by the SEC and the Department of Labor. But rather than illuminating the retirement investing problem, the discussion has only highlighted a yawning deficit in the public debate.
The first criticism of target-date funds is that they are too risky, particularly the 2010 funds for those approaching retirement, which fell sharply in the 2008–2009 market meltdown. Policymakers and commentators complain that the risks were too large. The Federal Thrift Savings Plan for federal employees is sometimes held up as a better model for the private sector. It had a 2010 fund that declined by a small amount.
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The vast majority of what you read and hear about investing focuses on returns. As in, what mutual fund, or stock, or asset class investors ought to buy now to garner the best return for some indeterminate period. Or which stock or mutual fund had the best or worst returns for a given quarter or year or decade.
Risk—the flip side of reward—tends to get much less attention, except in the wake of severe market slides such as we’ve seen recently. And that’s not sensible, because risks are always present in investing (well, in life, too, of course), even if those risks are not apparent.
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