Yesterday, I wrote about the issue of long term risk and how two academics are suggesting that the long run may be riskier than the short run. My own, decidedly non-academic views are shaped primarily by my parents' experiences in the 1980-1982 recession. My dad decided to invest 100% of the family emergency's fund in aggressive growth stocks. Not surprisingly, the 1980-1982 recession took a toll on my family's emergency fund. I remembered my parents talking about it and my mom grumbling about how the family lost at least $20,000, if not more. That was a pivotal moment in my parents' financial planning, as my mom decided that all future investments would be in FDIC-guaranteed CDs and bank instruments.
My parents' 1980s financial turmoil struck a nerve in me. I was in elementary school at that time and my brothers and I had to make significant financial sacrifices. It was my first introduction to frugal living and something that really made a significant impact on me. When I finished graduate school and started working in 2002, life was great. Pay was good and I opened my 401k with a 50-50 (stocks/bonds) mix. The stock market shot through the roof and my quarterly statements look great. However, some time in 2006 I was beginning to feel uneasy. I thought that the property bubble was unsustainable, especially when several extended family members quit their jobs to get into the mortgage broking business because it was minting money. In mid-2006, I told my 401k administrator to switch my entire retirement holdings to a stable-value fund. That's right. Everyone thought I was out of my mind. Inflation would out-run the guaranteed interest. I was in my 30s and should be able to take on greater risk. I have cousins who thought that I was losing out.
After the 2008 crash, it appears that my 2006 decision is prescient. If I had switched in 2007, I could have made even more money. But nevertheless, my retirement portfolio grows at a reasonable 4.5% pace. Hopefully AIG or whoever the insurer that is insuring my stable value fund will not go bankrupt. It really does feel good that my 401k is growing at a respectable pace (with low inflation) while my colleagues are looking at 30%-50% losses, depending on how aggressive they have invested.
I'm not saying that everyone should turn to stable-value funds. But it works for me. When I read about would-be retirees who have invested for 30-40 years and hoping to retire around this time, but now having to postpone their retirement because their 401k have dropped by 30%-40% in value, I realize that the "long run" is meaningless if you need the money now. Many of my colleagues scoffed at stable value funds, saying they are stodgy and plodding in its "stable" growth. After the 2008 crash, I realize the forgotten wisdom in the old Aesop fable of the hare and the tortoise, i.e., "slow and steady wins the race." And when I read about academics who suggest that the long run may be riskier than assumed, I think I made the right decision to opt for steady unspectacular growth that result in intact principal + reasonable growth.
In the next part, I'll discuss my understanding of risk and how this influences my savings and investment strategies.
My parents' 1980s financial turmoil struck a nerve in me. I was in elementary school at that time and my brothers and I had to make significant financial sacrifices. It was my first introduction to frugal living and something that really made a significant impact on me. When I finished graduate school and started working in 2002, life was great. Pay was good and I opened my 401k with a 50-50 (stocks/bonds) mix. The stock market shot through the roof and my quarterly statements look great. However, some time in 2006 I was beginning to feel uneasy. I thought that the property bubble was unsustainable, especially when several extended family members quit their jobs to get into the mortgage broking business because it was minting money. In mid-2006, I told my 401k administrator to switch my entire retirement holdings to a stable-value fund. That's right. Everyone thought I was out of my mind. Inflation would out-run the guaranteed interest. I was in my 30s and should be able to take on greater risk. I have cousins who thought that I was losing out.
After the 2008 crash, it appears that my 2006 decision is prescient. If I had switched in 2007, I could have made even more money. But nevertheless, my retirement portfolio grows at a reasonable 4.5% pace. Hopefully AIG or whoever the insurer that is insuring my stable value fund will not go bankrupt. It really does feel good that my 401k is growing at a respectable pace (with low inflation) while my colleagues are looking at 30%-50% losses, depending on how aggressive they have invested.
I'm not saying that everyone should turn to stable-value funds. But it works for me. When I read about would-be retirees who have invested for 30-40 years and hoping to retire around this time, but now having to postpone their retirement because their 401k have dropped by 30%-40% in value, I realize that the "long run" is meaningless if you need the money now. Many of my colleagues scoffed at stable value funds, saying they are stodgy and plodding in its "stable" growth. After the 2008 crash, I realize the forgotten wisdom in the old Aesop fable of the hare and the tortoise, i.e., "slow and steady wins the race." And when I read about academics who suggest that the long run may be riskier than assumed, I think I made the right decision to opt for steady unspectacular growth that result in intact principal + reasonable growth.
In the next part, I'll discuss my understanding of risk and how this influences my savings and investment strategies.
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