Retire Stock-less?!? Blasphemy!

Mar 19, 2012 by

retire without stocksIf you’ve been reading this blog much, you know I’m skeptical of the conventional wisdom that a secure retirement requires investing the lion’s share of one’s net worth in stocks. (See Must I Own Stocks?, Buyer Beware Applies to Wall Street, and High-Dividend Stocks.) This dictum has become so predominant that non-believers have largely been hushed for fear of being labelled cranks.

Why I’m a Skeptic

The opportunity to own a piece of a Google or an Apple or (once upon a time) a General Motors is one of the great features of capitalism. But, in my opinion, the doctrine making investing in such companies a virtual prerequisite to a secure retirement is purely an invention of the supercharged Wall Street marketing machine, unrooted in any analysis that could be labelled truly academic or scientific. Further, I think the culture around equity investing has become dangerously polluted by trading (gambling would be a more accurate term) in unregulated financial artifices with zero economic utility and sophisticated, technology-driven trading schemes that generate huge profits at the expense of the individual investor. In short, I see individual investors as suckers playing in a rigged game, the rules of which they do not begin to fathom.

A Breath of Fresh Air

In a recent article in the online Wall Street Journal titled “Why Stocks Are Riskier Than You Think”, by Drs. Zvi Bodie and Rachelle Taqqu, I found a welcome respite from the money managers’ self-serving drumbeat. The authors—academics, not Wall Street types (though they do have a book for sale)—argue for an alternative long-term investing strategy, which they summarize thusly:

“A safer way [vs. plowing cash into stocks] to build and protect retirement assets is to picture your goals as clearly as possible. Then pare things back to the basics. Figure out the bare-bones level of income you need and invest in products that guarantee it, such as inflation-protected bonds. Use the rest of your investment money to build reserves to fund your aspirational goals.”


To give you a flavor, here are few excerpts from the article:

  • “It may be hard to let go of the belief that buying and holding stocks is a sure-fire key to asset growth. But that’s because people have been lulled into thinking that long-term stock investing greatly reduces the risks. The truth is that stocks are risky no matter how long you hold them.” [emphasis added]
  • “Despite the assurances of the financial industry, stocks are always a risky investment, and the longer you hold them, the better your chances of getting blindsided by a downturn.” [emphasis added]
  • “There are a number of different approaches that demonstrate why the conventional wisdom about stocks is wrong. One of them has to do with bear markets, which happen regularly; the long growth stretch that began in 1983 and lasted through the 1990s has not been the norm. And the longer you hold onto your stocks, the greater your chances of running into one of those downturns.”
  • “To prove their claim that stocks are not very risky in the long run, stock enthusiasts argue that stocks have beaten bonds for every 30-year period starting in 1861—except for the most recent one. But their evidence is much thinner than it appears: Since 1861, there have been only five non-overlapping 30-year periods! Statistically, that’s simply too few independent periods to justify the conventional conclusions.”

A New Strategy

The authors’ alternative long-term strategy is described in some detail in the article. They’ve also written a book: “Risk Less and Prosper: Your Guide to Safer Investing”. (I’ll be reviewing it here soon.) The graphic to the right, borrowed from the Wall Street Journal article, depicts the differences between TIPS and I Bonds, as investing in these securities plays an integral role in the authors’ ideas for creating a “safety net,” a key part of the their strategy.

Your Thoughts?

Have you read the book? Any thoughts on Drs. Bodie and Taqqu’s analysis and perspective?


Photo courtesy of Bill Kuffrey.

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