Friday, October 31, 2014

My Personalized "Truthful" Halloween Message .... Don't Get "Spooked" Out of the Market ... The "Experts" Say My IRA Asset Allocation Has Been Too Risky for 40+ Years ... I Say They're Wrong

Keenan's post today is about truth telling. So here's my truthful message about how I've invested and continue to invest in 401(k) and IRA assets for more than 40 years. It's essentially an all stocks, all the time, way of saving and investing for the future. And since it's served my family well over the years, it may help you too. Helping others to achieve basic financial literacy and an understanding of the basics is the 'truth,' the 'plan,' and the central 'message' underlying all this personalized blogging of mine.

The stock market performed very well yesterday, and it looks like today will be another winner, making October as a whole a gainer and a sign that all is well for individual investors. My post yesterday predicted gains of 10% to 15% over the next 18 months or so, and that makes me a bull, I guess. In my view, however, it simply means that I believe in the improving U.S. economy and that over the long haul stocks will rise. Currently things look to me to be especially attractive for long term oriented individual investors.

My 401(k) and now IRA investments have consistently and continuously invested 90%+ in stocks for more than 40 years. That's long been my plan and I'm sticking to it even now for one simple reason: over the long haul, stocks outperform all other asset classes.

Got an IRA? Chances are it's too risky clearly disagrees with my 'risky' approach:

"The majority of retirement savers with IRAs have “extreme” asset allocations--and that could expose them to some big-time risks.

According to a report released Wednesday by the nonprofit, nonpartisan Employee Benefit Research Institute, nearly 60% of individual retirement account (IRA) owners had their savings in an “extreme” investment allocation in 2012—meaning they held less than 10%, or more than 90%, of their IRA investments in just one investment category.

Specifically, nearly one in four (23.7%) IRA owners had less than 10% of their assets in equities, while nearly one in three (35.5%) had more than 90% in equities; furthermore, almost 1 in 5 (18.5%) had more than 90% of their assets in bonds and “money” (which EBRI defined as very safe investments like certificates of deposit and money market mutual funds).

The EBRI study examined more than 25.3 million IRA accounts with total assets of $2.09 trillion.
Most of the time, having your assets so concentrated in any one asset class is a no-no, say financial advisers. “Extreme allocations are inherently riskier allocations,” says Randall R. Cooper, principal at Life Transition Planning, who notes that these extreme portfolio allocations are often created by accident when investors chase assets that historically had high returns. “In the long run, this strategy often does not work,” he says, adding that “a balanced portfolio will generally capture the best-performing assets.”

Of course, there are exceptions to the balance-is-best rule. One big one is that young people and retirement-aged people may actually want to have their assets in “extreme” allocations. “The general rule of thumb is that if we have less time to retirement…then we put more in conservative and less volatile choices,” explains Wan McCormick, a financial planner at Reliable Alliance Financial. Thus, many older people should be heavily invested in bonds and money, while many very young people should be heavily concentrated in equities.
‘Extreme’ asset allocations in IRAs:
Significant percentages of investors are either heavily concentrated or underinvested in certain assets. (The figures here include assets held in balanced mutual funds; “money” includes money-market funds and CDs.)
AgeLess than 10% in equitiesMore than 90% in equitiesLess than 10% in bonds and moneyMore than 90% in bonds and money
Under 2524.2%38.6%42.6%20.7%
85 or older29.5%29.6%37.4%22%
Source: Employee Benefit Research Institute

But, that’s often not what’s going on in IRAs. Indeed, at a time when they should be heavily invested in equities, nearly one in four Americans under 25 who had an IRA had less than 10% of their IRA portfolio in equities, while just 38.6% has more than 90% in equities . . . .

Summing Up

I've always loaded up on stocks for one simple reason.

Over time they outperform all other investment categories by a wide margin and more than offset inflation.

Today interest rates are low. A few years from now they will be markedly higher. That means bonds won't do well.

On the other hand, cash like instruments such as money market funds, gold and C.D.s are at historic lows and won't offset inflation over time, let along earn a real return.

When a long term perspective is taken, stocks aren't riskier than other investments. While their prices do fluctuate and often rise and fall violently from time to time, they also outperform both inflation and other investments by a wide margin over the long haul.

Yesterday and today both look to be strong days of outsized gains. On other days prices will fall. But it looks to me like we're setting up for a nice year end rally and not the 'correction' that most 'experts' have been predicting.

In any case, those interested in their long term financial health and well being won't become either "irrationally exuberant" or "spooked" (pun intended) by these short term moves. They instead will stay focused on the long term.

That's my truthful take this final day of October. Let's not get "spooked" and miss out on the market's gains.

Happy Halloween. Bob.

No comments:

Post a Comment