Longer Than You Think

One nice thing about writing a column is putting it off, at least for a while but they don’t call it a deadline for nothing.  So sitting here at 11am with a noon deadline, I have to do what I do best—steal something.  Here’s the gist—most people go conservative in their investments when they retire which makes sense now with the market in the dumpster but won’t look so smart, or profitable, when the market recovers.  Alternatives are outlined in the Wall Street article by Ian MacDonald titled “In the Long Term, Assume You will be spending.

First, because of medical advancements and, hopefully, a healthy gene pool, you may live a long time, like maybe to a hundred.  If you do, let’s see how differing investments hold up over time, a long time.

A real popular investment(?) right now is something called an immediate annuity.  Here is what McDonald says about this scheme—“ An immediate annuity is an insurance product (not investment product) in which the buyer relinquishes ownership of his (or her) hard-earned assets in return for a guaranteed income stream. Sounds great, right? Guaranteed! Guarantees are fun. Nothing’s ever guaranteed with investing! But buying an immediate annuity pretty much guarantees inflation will kill you.

 

We all know you should assume a longer time horizon (and it can’t hurt to err on the side of longer vs. shorter). So let’s say you have a 30-year time horizon (or longer!). If you need $50,000 a year to maintain your lifestyle—in 30 years you’ll likely need $125,000 because of inflation! Said another way: If you buy an immediate annuity, start thinking about how to explain to your spouse that in 30 years, you’ll be living on 60% less. And, you surrender ownership of the assets. If you get hit by a bus the day after buying the annuity—too bad, so sad—the insurance company gets your money, not your spouse or kids.”  Ouch, nothing to like their, either in the short term or the long term.

 

Bonds, anyone?  Here is Ian’s take on those—“If you have a long time horizon, stocks, or at least a hefty allocation of stocks, are probably most appropriate for you. Since 1926 there have been 62 rolling 20-year periods. In all but one (98% of the time), stocks beat bonds handily—and by an average margin of 3.8 to 1 margin. Some Gloomy Gus might say, “Yeah, but there was that one period. I’ll take the inferior returns in exchange for less day-to-day volatility.” Be our guest, but the margin for that one 20-year period when bonds beat stocks was a less impressive 1.4 to 1. Big whoop. In our view, hardly worth the odds. Plus, that one period required buying at the peak in 1929 and riding down the Great Depression into World War II—a pretty unique period.”

 

McDonald wraps it up this way—“Assuming a longer time horizon is the first step, but you can still get slaughtered if you don’t craft your strategy with enough growth. If you don’t relish living on much less later in retirement, bonds can actually be far riskier than stocks. As for the immediate annuity—we’ll assume you don’t hate your spouse enough to make that mistake.”

 

I guess I would try to simplify it a bit—annuities and bonds are stable, you know exactly what you are going to get.  Unfortunately, you don’t know what you are going to get from inflation and there is the problem.  Annuities and bonds are fixed, stocks are not which in the long run, and we are in this for the long run, is good.  Stocks are not fixed because they represent companies run by people; people who want to succeed and get wealthy.  You, as the investor with a long time horizon, should go along for the ride.

 

 

 

 

 

 

 

 

 

Comments

[StL Pastor]

You know, you can buy an immediate annuity with inflation protection (3% or 5% annual growth). A little more upfront, but same deal, risk free for the cost. It might make people more comfortable investing in stocks if they started with a good chunk guaranteed.

[Chris Leow]

Well, we in Malaysia seem to be doing well we have high growth and high inflation. An example of inflation would be the local desert "cendol" bought about a month ago at the price of $1.20 in local currency would now sell for $ 1.80 in local currency. Job growth is also strong as we have 2 jobs for every worker and Malaysia imports in foreign labour to do jobs that local workers do not want to do. Hence our problem in Malaysia is now high inflation and good news, high growth.. We do not understand why the Western Media keeps on saying we are in a Recession. Yes our economy slowed down in March 2009 but after that period our economy is now experiencing high growth and high inflation thanks to China's strong buying of Malaysian goods and services, thank you China ! So please do not say Malaysia is in a Recession when it is not, only the US is in a Recession, the rest of the World is booming thanks to China !