When I was entering my teens, my mother was interested in investing. She bought some stocks. We did not get rich. In those days, the mid fifties, the Great Depression happened, as it were, just yesterday. People knew money could be made in the stock market. They also knew the market was a gamble. No one bought stocks unless they had a little money they could risk losing. No one risked retirement income in the stock market.
Now this was also the time when there were tales of people buying Xerox or IBM in the thirties and ending up millionaires. I frankly don't recall these stories as much more than urban legends. Yet they persisted. I even dated a young woman during college who bought Sears Roebuck stock with part of her pay because of the story of a woman retiring from Sears with $1M in stock. Yet during this time people still considered stocks as too risky to be counted on for retirement. If they increased in value, that would be gravy. Pension funds and Social Security were the meat and potatoes of retirement.
What changed? About the eighties, the Hippie generation became the Yuppie generation. We had come through the inflation of the late seventies and realized having a lot of money was a good hedge against inflation. We were starting families and wanted our children to be economically secure. We also didn't want to depend on just a pension check and Social Security if inflation reared it's head again. About this time, companies wanted to secure good corporate officers and tie them to the company they headed, as well. Companies petitioned the government to allow the formation of IRA accounts. These were tied to the company's stock. If a CEO wanted to increase the value of his or her holdings, s/he had to grow the business.
Somewhere in all of this, lower level managers and workers wanted to set up IRA accounts. It was well known that diversification was a good hedge against stock fluctuation. These new IRAs' used mutual funds to simplify diversification. As you can imagine, Wall Street was all over this idea. They had long wanted the billions in Social Security. The IRAs' were a great access point to the money set aside for retirement. They could continue the fight to get Social Security money turned over to them, as almost happened during the last Bush Administration. In light of the meltdown in 2008, that was a catastrophe narrowly averted.
Now consider being at retirement age in 2008. Pensions are gone, long ago converted to IRAs. The IRAs lost value in 2008 and have yet to regain their value. That leaves Social Security. It is not a pretty picture. If you lost your job just before retirement, you're in even worse condition. While there are recommendations to raise retirement age for Social Security, the reality is if you're an older worker, it is difficult to get a job. It is interesting those making this recommendation are mostly retired law makers and not dependent on Social Security. I wonder if they'd be willing to give up part of their Congressional retirement to help out Social Security.
So this brings us back to the economic philosophy of my parents' generation. They weren't smarter than us. They simply lived closer to reality. Their philosophy was pragmatic. Invest in the market only if you can adjust to the loss of the money invested. Don't put your retirement into the market. It may not be there when you need it. Just ask any boomer getting ready to retire if this is so. When I hear a financial planner talk about IRAs' and stocks, I wonder how closely s/he examined their recommendation, if at all. They parrot the accepted investment philosophy. Do they really understand what they are recommending as they continue to advocate the same policies that brought about the current financial crisis?
The current crisis happened because the captains of business ignored basic business practices. They bought out Congress and changed the rules that made our economy the envy of the world. Then they bought the tax structure that shifted the tax burden from the wealthy to the average American. In the wake of the devastation Wall Street brought on the nation, Wall Street continues to advocate the same policies! There is a saying that continuing to do the same thing while expecting different results is insanity.
One last point. The talking heads complain Americans don't save enough, particularly for retirement. This point of view needs perspective. Since the eighties, middle class income has been in decline. There is less money to save after expenses are paid. Expenses are, well, more expensive. Commuting, health care, heating, the list grows every year. Consider health insurance. More of the cost is shifted to the individual. Co pays are also rising. Health insurance is more expensive and the money spent buys less coverage. It can cost $5,000.00 a year for coverage that doesn't kick in until an additional $5,000.00 is paid out. How many people can save for retirement when paying out $10K a year just for health care? Especially when fully 50% goes into the deep pockets of the health insurance industry. I would love to have a group of people pay me $5k a year with little expectation of even a reasonable return. Actually, I would have pangs of conscience. Can health insurers say as much?
Another condition to encourage savings is a decent rate of return. The rate has been under 1% for many years, even during the good times. The rate is so low as to discourage saving. Now examine your situation. You set aside for health care, retirement, perhaps a child's college fund. You pay a mortgage or rent. You pay utilities, food, clothing, taxes and shelter. How do you live? What do you live on? Like most people, you just don't save money you don't have.
So what is my investment philosophy? First, if you can't afford to lose the money, you should not invest in stocks. This is especially true for retirement and college funds. Talk with your financial planner by all means, closely question all recommendations to invest in stocks or mutual funds. If market investments are strongly advised they should be willing to indemnify all market losses. After all, if the market is such a good investment there ought to be a guarantee. Financial planners should be willing to share your risk at taking their advice. (I will be fascinated if you share their response.) Ask about an alternate investment to stocks. Also talk with your insurance agent about annuities and other policies. Finally, look at e-savings. The last time I investigated, admittedly a while ago, the interest was above 6%. When I mentioned e-savings to my bank, they brought out a packet for their version of e-savings. Funny they don't advertise the program. Remember, even financial instruments offered by insurers are dependent on the stock market. There are o guarantees. Your own prudence is what should govern investing, not the current fad of mutual fund IRAs'.
Here is an interesting discussion about stock investments on Ted.com by Halla Tomasdottir of Iceland. http://www.ted.com/talks/halla_tomasdottir.html
Addendum: Listening to radio reports, I am troubled a number of states are contemplating the end of pension funds in favor of stock market based retirement plans. It is certain financial institutions are encouraging this change and likely lobbying for it. The boldness of their action in this economy is stunning.
On a brighter side, I speak with more and more people who are moving retirement funds out of stocks. Many are young adults who see their grandparents struggle because of the stock market. Others are adults with IRA's and 401K's who lost money in the stock market. This seems to be a growing trend and one I applaud.
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