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Making the economic crisis personal: What do you tell family and friends?

by marco Fri Oct 10th, 2008 at 08:09:25 AM EST

I've been thinking about my parents more and more over the last few weeks and especially the last several days, but when I read this headline and these paragraphs in the International Herald Tribune yesterday --

The week that dashed baby boomers' dreams

Of all those who watched the swooning graphs of the marketplace describe the parabola of their fortune's decline, perhaps the legions of the baby-boom generation were the most rueful, the least likely to believe they had time to recover, the most likely to ponder the validity of the promise after the Great Depression and World War II that things would only get better. ...

But that assumption began to look questionable - to say the very least - as the crisis began to spill its toxins from the arcane mysteries of high finance into ordinary people's pocketbooks.

By depending so much on stock-based savings, the baby boomers were exposed to the prospect of their golden years being straitened or even canceled: paradise deferred indefinitely.

-- I said, "That's it.  I need to start getting some serious advice and information about what they should be doing with their savings, because things are starting to look more than ugly; they're starting to look scary."


Two days ago, the New York Times had an article titled "Switching to Cash May Feel Safe, but Risks Remain" which said:

... some retirees, or those close to leaving the work force, may be well-off enough to leave stocks behind for now. If the tumult in the economy and the decline in the markets have altered your risk tolerance, then it may make sense to move to a portfolio of Treasury bills, certificates of deposit and money market funds.

On the other hand,

If you can't afford to live off the proceeds of cash investments (or dividends from your investment in your kids' pizza joints), you may have no choice but to hold on to whatever stocks you have left. Then, you can hope for a rebound that will allow you to live out your later years more comfortably. Selling now and moving to cash could mean guaranteeing a lower standard of living for the rest of your life, because you'd be locking in your losses.

My parents are 67 and 65, and they plan to retire in the next two to three years.  I am praying that their financial advisor has already moved their savings into money market funds and CDs.  If so, I think they have enough saved up to live off in their retirement. But I am worried:  while their financial manager is a very well meaning and nice guy, during the 90's tech boom he kept their 401k's in aggressive mutual funds until it was too late, and these lost an infuriating amount of their value by the time it was all over.

When I talk to them this weekend, would I be a Serious People if I told them to make sure that all their savings were in ultra-"safe" holdings like money market funds and CDs?  Are there any other factors I should consider?

And cranking up the paranoia another notch up: How about for friends who are still in their late twenties and thirties, who are just starting (sometimes rather large) families?  Not that any of them are coming to me for financial advice (no one could be that foolish), but talking, emailing and chatting with them, I get the feeling that the great majority of them are completely unaware that the crisis may very well roll up onto their front lawns and into their homes in the coming days and weeks.  And I want to ask them, "Are you guys buckling up for the ride?"

But then I ask myself, am I the one who is overreacting?

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I don't give investment advice, sorry :-)

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 08:15:10 AM EST
Except: "don't".

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 08:16:25 AM EST
[ Parent ]
I never believed that market investment was a way to ensure pensions universally (or almost universally). In the long run, the percentage of substantial benefactors cannot be high. And it is certainly not the way to meet demographic waves: boomers actually compete among themselves, so they overpay for stocks but would retrieve less value. And besides, one market crash in the long period before retirement is enough to be left with nothing. But while everything seems to be working (as with CDOs), it is hard to convince.

The Bush Social Security plan (or, in fact, any inviting enthusiasm about stock market) is just a trick to suck people's savings into Wall Street. People can't get richer retirement all together with more intermediaries and higher administrative costs.

by das monde on Fri Oct 10th, 2008 at 08:34:24 AM EST
If the state was not going to be able to pay the pensions, where was the money supposed to come with to support the market valuation of private pension funds?

The whole pension crisis story is bogus marketing for the asset management industry.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 08:41:45 AM EST
[ Parent ]
where was the money supposed to come with

Um, to come from

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 09:33:22 AM EST
[ Parent ]
Is to be 100 % share and 0 % bond 10 years before you retire, and then move 10 % of the capital from shares to bonds per year, so that one year before you retire you will be 90 % bond and 10 % share.

This is the minimum route: you migh well start moving from shares to bonds earlier, but not later than 10 years before you retire.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Oct 10th, 2008 at 09:58:01 AM EST
Would you say that rule still hold these days?

Truth unfolds in time through a communal process.
by marco on Fri Oct 10th, 2008 at 11:22:00 AM EST
[ Parent ]
The idea is that if there's a market meltdown 3 years before you're set to retire, you only lose 30% of your portfolio. But it also means that if you're 10 years from retirement you could lose it all.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 11:26:11 AM EST
[ Parent ]
Migeru: The idea is that if there's a market meltdown 3 years before you're set to retire, you only lose 30% of your portfolio. But it also means that if you're 10 years from retirement you could lose it all.

But say all my savings were in bonds and I just retired.  Then according to my very naïve reading of the following article, they would still be going down in value, wouldn't they?

Bond prices fall as investors scramble for cash

U.S. Treasuries mostly fell on Friday as the ever-worsening credit crisis had investors selling out of even lower-risk government debt in a mad scramble to turn any investment into cash.

U.S. stocks plunged on Friday, following an equities rout on Thursday and then a global stocks tailspin overnight.

Normally, stocks weakness would spur buying into safer-haven government debt, but analysts said the outlook has become so dire that investors were selling anything they can, including Treasuries, to get their hands on cash.

Only short-term Treasury bills, which are considered pretty much a cash equivalent, were able to catch a bit of a bid.

"We are not used to seeing stocks implode and Treasuries sell off (at the same time)," said Josh Stiles, senior bond strategist at IDEAglobal in New York, adding "but people are saying they don't even want to be in Treasuries now, they need the cash."



Truth unfolds in time through a communal process.
by marco on Fri Oct 10th, 2008 at 11:52:44 AM EST
[ Parent ]
"Falling" does not mean the same thing for treasuries (at least medium maturities, coupon-paying ones), even when yields go up "sharply" (like +10% in yields from 4.4% to 4.84%, it means only that the market price of the coupon bond is down a few percent for a maturity a decade away)

Pierre
by Pierre on Fri Oct 10th, 2008 at 12:14:14 PM EST
[ Parent ]
Bond prices go down but bonds pay to income as a fraction of the principal value.

That's why bonds are called fixed income securities as opposed to variable income securities (shares or cash equities, which pay dividends).

If you hold a bond to maturity you know exactly how much money you're getting and on which dates (normally every 6 months) unless the bond issuer defaults.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Fri Oct 10th, 2008 at 12:44:09 PM EST
[ Parent ]
Google the PIMCO Total Return fund, one of the largest US bond funds, and check out what they've been up to. They aren't as conservative as one would think. Of course one of the more skeptical articles was an old one from AIG. Heh.
by northsylvania on Mon Oct 13th, 2008 at 03:03:56 PM EST
[ Parent ]
Lehman Brothers has historically been at the centre of the US bond market, and you saw what happened to them.

One of the "innovative" features of finance in recent years is the use of equity-style investment techniques with high turnovers and more focus on bond price than on the income. That may have been a very bad idea precisely because of the default risk.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Tue Oct 14th, 2008 at 08:47:16 AM EST
[ Parent ]
marco:
"We are not used to seeing stocks implode and Treasuries sell off (at the same time)," said Josh Stiles, senior bond strategist at IDEAglobal in New York, adding "but people are saying they don't even want to be in Treasuries now, they need the cash."

a lot of financial advisers are parroting 'cash is king', which i can only take to mean that any investment vehicle is inherently not suspicion-free.

everyone know that's paranoid, because cash dwindles in value unless it's growing faster than inflation, but these are times in economic history like no other, so it appears under the mattress is safer than any of these oh-so ex-respectable banks and brokerage houses.

personally i think buying tools and seeds while one still freely can is the one sure way to invest. that kind of bank is harder to crumble or flood.

brokerage...the name says it all.

go-for-brokerage, more like.

as a boomer, i watched the survivors of the war, the emerging middle class, my parents' generation, the last age of petro-innocence, and they were the 'sunset effect' of the cheap energy boom that led to so many people feeling entitled to a comfortable retirement, cushioned with nice dividends from the 'endless growth' economy, which has revealed itself during our boomer adulthood to be built on sand, (middle eastern variety), more myth than sustainable reality.

this financial independence in the golden years has boosted worker productivity, as families used to support the old, now there's service industry to do it.

this also led to the atomisation of families, people going to retire far away, because they didn't need to huddle so much.

all this is about to shift back, i think, and i beleve it will do wonders for our mental health, as often disconnected from their roots, young working parents attempt the demanding job of raising children without much family day-to-day support, and so often lack energy and quality time to really bring them up well, leading to much adolescent unhappiness and acting out...

silver lining...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Sat Oct 11th, 2008 at 06:58:18 AM EST
[ Parent ]
a lot of financial advisers are parroting 'cash is king', which i can only take to mean that any investment vehicle is inherently not suspicion-free.

No. The liquidity premium has gone through the roof. Cash is the most liquid asset.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Sat Oct 11th, 2008 at 02:37:57 PM EST
[ Parent ]
I think that is too aggressive. And in protection of a systemic meltdown, starting with 40 or so you should have a couple % of your portfolio in gold or other industrial metals (gold has the advantage you can store it easily at home).
Bonds would have been great over the last 10-15 years, so I think 10 years is clearly a too short horizon to start shifting out of stocks. As well it doesn't take into account that you may e.g. become a disabled person before you retire, or you may want to become self-employed and need start capital, or you want to build a house and have to pay down 20% to get a cheap credit. So even as a young person I would keep 15-30% of my savings in credit and coupon markets.
And depending on your financial situation, I would not go out of stocks so much as an older person, but that of course is connected with the idea to pass on some of your assets to your children, which is not to the taste of everybody.

Der Amerikaner ist die Orchidee unter den Menschen
Volker Pispers
by Martin (weiser.mensch(at)googlemail.com) on Fri Oct 10th, 2008 at 01:24:03 PM EST
[ Parent ]


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