Every adult has heard the saying, "Don't count your chickens before they hatch." That folksy warning is very applicable to the current stock and bond market in the United States. It will be the underlying theme for this article.
I caution you not to count your "investment chickens" before they hatch. Apparently, a lot of people are doing that right now with their 401(k) and IRA accounts. This 18-year bull market has produced a lot of paper millionaires. They are already starting to expand their lifestyles and spending in anticipation of a comfortable and affluent retirement. At the same time, they are buying more common stock on margin; i.e., borrowing to buy. Margin debt is at record levels. Be warned! A bear market can happen at any time. Your paper wealth will go up in smoke!
Just think about what it really means to reach retirement age right now with $1,000,000 in your 401(k) or IRA plan. Could you really live the expected next 20 to 30 years without having that retirement nest egg grow at the rate of probable inflation (about 3 percent per year)? Remember that currently retirement withdrawals will be taxed at the regular tax rate, not the reduced capital gains rate. That means you will still need to have some investment in risky stocks or high yielding bonds to stay ahead of inflation and not spend all of your nest egg before you "croak." (I hope that idea does not depress you too much. It happens to the best of us!)
To stay ahead of the erosive effects of inflation, you will have to risk continued exposure to the ups and downs of the stock and bond markets. A passive buy and hold strategy could mean watching 20 percent, 30 percent or more of your retirement nest egg wiped out in multi-year bear markets. You need to develop a long-term investment strategy for your retirement years that meets the dual need to have income at the same time your retirement capital is replenished. A buy and hold strategy just will not provide adequate retirement income and capital presentation, or market risk protection for periods of time longer than a few years. That is an interesting problem for which I have a solution. But the more important question is how are you preparing to solve that little problem?
My personal solution is that I use my proprietary market timing formula with most gratifying results. But I am a full-time professional investor. Market timing is a very dangerous tool in the hands of amateurs.
My recommendation to you is that you sit down with your investment advisor and review your portfolio strategy. Are you taking too much or too little risk to accomplish your long-term objectives? Now is the time to make adjustments, not after the deluge.
If you have any questions or suggestions, write to me at the Nevada Appeal or e-mail me at maclin@powernet.net.
Clifton Maclin is an SEC-registered financial services representative in Carson City.