, Newburyport, MA

February 7, 2012

Where did your investments spend the last three years?

Money Matters
Donald E. Askey

It's three years and one quarter since the banking crisis of September 2008. The housing market had already started to decline at that time, but nothing recently has hit us as fast and as hard as the loss in stock values following the failure of Lehman Brothers. This was also a time of significant loss of confidence in the market, in banks and in rating agencies.

Many investors panicked and pulled out of the stock market and sat on the sideline in cash. What did you do at the end of 2008? Did you liquidate your investments? Have you remained completely out of the stock market since? Was retirement the purpose of your investments?

Fortunately, enough time has passed now that we can look objectively at the results of investor behavior since late 2008, especially among those nearing retirement — those who feel the most vulnerable. After all, if what they have taken a lifetime to save seems at serious risk just about when they become dependent on those savings, they may easily panic.

The bottom line for prospective retirees is dramatically distinct between those who remained in appropriately diversified portfolios and those who went to cash, according to a recent study published by the Society of Actuaries.

With "modest increases in savings combined with slightly delayed retirement," pre-2008 retirement outlooks would recover if investors stayed in appropriately diversified portfolios.

"Investors who moved to all-cash portfolios, on the other hand, have more work to do to get back on track ... these are likely to have to delay retirement as much as four years above and beyond the steps needed to recover from the 2008 downturn had they stayed in" appropriately diversified portfolios.

An investor could recover from the 2008 downturn by either saving more or working longer. Of these two options, working longer, say, 1.5 to 3 years, will more viably get an investor the pre-2008 retirement income desired. But this assumes continued and appropriate exposure to the stock market.

"It is common for investors to respond to a severe market downturn by seeking to protect their remaining assets, often by moving them into instruments they view as extremely safe and conservative. While this reaction is understandable, it can have a very negative impact on an investor's future" retirement income.

The study found that by switching to all-cash portfolios, investors "have very little chance of reaching their retirement-income goals." The cost of panic may be unrecoverable. "Panicking will substantially exacerbate the negative effects" of a market downturn, "making a bad situation even worse. In fact, in some cases the extra years of work required" from going to cash are greater than those due to the market drop itself.

The implications of the findings of the actuarial study apply to panicking or going to cash following any precipitous drop in the market, not just the 2008 drop. The combined discipline of continued regular savings and portfolio diversification is key to reaching financial goals. Those nearing retirement can also add to their retirement income by working a little longer and saving even a little bit more in these times.

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Donald E. Askey, a Certified Financial Planner professional and president of Provident Advisory Group, is a registered fee-only adviser, headquartered in Newburyport. For questions, visit