Do You Need to Be Invested?
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Another characteristic of private plans is that they often involve investing in the stock market; for many 401(k)s, that is what the account is structured to do. Instead of asking whether defined contribution plans are good or bad, a more important question to ask is whether we need to invest in stocks and mutual funds at all. The truth is that there is no academic evidence that we need to be invested in risky stocks or mutual funds. On the contrary, there are two fundamental reasons why you should stay away completely.
You know you can’t and don’t want to handle the possible psychological agony and the real financial consequences related to financial markets.
You have neither the knowledge nor the experience in financial market investing.
Ask yourself, how you would react to see your retirement portfolio reduced by 30% or more due to a blip in the market, even if your retirement is yet decades away. Can you trust yourself to stay the course? How much are you able and willing to lose? If the answer is “not much,” then it’s only prudent to make a conscious decision to stay away completely from any financial market product. Keep in mind the answer to this question is not purely mathematical— you need to understand what sort of an impact price declines and real losses will have on your life and your psychology. However, people aren’t weak. To the contrary, we have built-in panic reflexes precisely to warn us when things are going wrong. Ignoring your instincts and reflexes may make sense in some settings; but in others, it makes none at all.
There are only two logical choices:
Stay away from Wall Street’s money game entirely and focus on the traditional ways of preparing for retirement, which includes not planning for retirement at all—the “default” position.
Study investing and its principles in detail and choose an appropriate strategy that suits your personality and God-given talents — the “optional” position. How do we move forward?
Default Asset: Cash is King
The best risk management policy in the world is to avoid unnecessary risks. If you don’t understand the games; don’t want to spend the time to learn them; and don’t want to let other gamblers play with your money, eliminate risk by not participating in the game. If you know yourself, and have a strong distaste for all things Wall Street or simply can’t stand the confusing nature of price auctions and price quotations, say, “No, thanks.” – A very conservative retirement option, but effective.
Don’t despair. There are plenty of ways to get you prepared the old-fashioned way. And contrary to today’s definition of saving for retirement, it all starts with good old cash. The absolute default position of any retirement plan or investing mission is always the least risky asset—and that is, by default, cash. Granted, it doesn’t yield anything, and it will lose in value the longer you keep it dormant, but that is never an excuse to gamble or to be forced into a decision one will later regret.
What it means is to put your money aside, a portion of any paycheck or income you earn. There are so many personal finance books that teach how to save money, so I will not go into detail here. Some of the advice is sheer borderline insanity, and there seems to be heated discussions and conflicting positions on how to spend your money. However, it works; and that savings is viable is demonstrated by Mr. Money Moustache, a popular personal finance blogger. “If you can save 50% of your take-home pay starting at age 20, you’ll be wealthy enough to retire by age 37,” he argues.
With this comes another core advantage: the optionality of cash. This is just a fancy way of saying that cash gives you more options than investments. If you have cash your money is easily accessible; you can buy what you like when you like it. You should not take this option lightly or for granted. No bank, professional portfolio manager, or even pension management has it; neither do full-time professional gamblers, day traders, and speculators. Controlling your cash and cash inflows is an enormous advantage to have.
The issue of fighting inflation remains. To compensate for this, keep your money in the highest quality short-term debt papers and government guaranteed debt notes, especially short term durations (not longer than a year) to avoid pricing risks. Through 401K or IRA plans, one could keep cash through high-quality money market funds that charge the least fees. The small income they generate could at least partially offset the risk of inflation while keeping market pricing risk low and liquidity high.
If you have access to Treasury Inflation-Protected Securities (TIPS), you should consider adding them to your retirement accounts. TIPS are extremely low-risk investments since they are backed by the U.S. government and the principle is inflation adjusted. According to TreasuryDirect, a website run by the Bureau of the Fiscal Service under the United States Department of the Treasury, “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.”
In today’s low-interest rate and inflation environment, their yields are low, but that might change quickly. In 2017, Federal Reserve Chairwoman Janet Yellen increased benchmark rates by 25 basis points twice, and most experts expect her to increase them by another 25 basis points later in 2017. Long-term yields have already reacted to this by showing a rising uptrend. Two-year Treasury notes yield 1.4% per year in June 2017, the highest yield in eight years.
It’s never a bad idea to keep a portion of your net worth in gold. General recommendations range from 5 to 10% with an emphasis on real physical gold, such as standard coins and bars. Gold has proven the test of time, not as an investment, but as insurance for your existing wealth. It’s a very liquid and broad market, and you can always sell it for a fair price. Surprisingly, in the age of digital currencies, gold has additional benefits. As James Rickard, famed author of the Road to Ruin, asserts: “You can’t hack it, you can’t erase it, you can’t delete it.”
The greatest advantage you have with this default option is simplicity and robustness. What you see is what you get. It’s easy to manage, usually comes at minimum fees, and you can always keep a close watch over how much you have. You will not be bothered by the constant fear of stock markets crashing, needing to chase the latest hot tip, or Wall Street stealing from orphans. You can focus on the tasks you are good at. Choosing the simple way of simply stashing your money will never give you a misguided sense of security based on unrealistic growth assumptions. If there is not enough money you will know in advance, and will be forced to make proper adjustments that reinforce positive action. You either work longer, find new job opportunities beyond retirement age, or simply save more, when you can. Indeed, a very conservative retirement option. Some might say “too conservative!”
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