You Can't Handle The Truth About Stocks

Over the Thanksgiving break, I was catching up on my backlog of magazine reading. An article in the September 2009 issue of Money Magazine caught my eye: You Can't Handle The Truth About Stocks, which profiles the economist, Zvi Bodie of Boston University School of Management, who argues against conventional financial planning:

"If you need the high return of stocks to reach your goals, then you can't afford to invest in them."

Here are some of his thoughts:

"... The standard models that are used to give investment advice to millions of Americans are fundamentally wrong. We're told that over time, stocks get less risky, but that's bull. Stocks are always risky -- whether in the short or long run. Prices dropped by 37% last year. While improbable, there's nothing to say they couldn't drop by that much again next year or the year before you retire. And diversification doesn't take away that risk. That's why retirement money belongs in truly safe assets whose value won't go down -- not in stocks..."

"... If you look at most online retirement calculators, they make two assumptions: one, that you want to retire at age 65, and two, that people will be able to save only a certain amount -- say 10%. As a result, they spit out risky portfolios to get a higher return. Well, who says we all want to retire at 65 and can save only 10%? What if I retire at 70 or 75? What if I save 30%? Suddenly, you don't need to take so much risk in your portfolio..."

"... notice what they're being told. They're being told that by investing in equities, they are going to get a higher return without extra risk. That's the problem. You have to make a sacrifice somewhere -- whether that means accepting a lower standard of living now, picking a later retirement date, or taking on risk in your portfolio..."

Professor Zvi Bodie echoes what I earlier blogged in April 2009 in a 4-part posting entitled "Frugal Living & Managing Risk" (Part 1, Part 2, Part 3, and Part 4) where I explained why I invest 100% of my 401K in a stable value fund.

As I see it, Americans want to have their cake and eat it. They want to retire in style but do not want to sacrifice, i.e., save, for it. If we only save 5% of our monthly income for our retirement vs. 30%, then we would have to take a lot more risk to have the 5% match up to the 30% savings rate. No wonder we take too much risk with our retirement funds. For me, the answer is clear: a simple and frugal lifestyle, with less stress and blood pressure worrying which direction my retirement savings is heading.