Know Your Demons

Richard Quinn

I’M WRITING THIS just before 6 a.m., following a few days during which world stock markets caught their own version of the flu. Frankly, I can’t sleep thinking about what’s happened—and especially about the investors who panicked and locked in their losses, just like so many folks did in late 2008 and early 2009.

It took me a few minutes to muster the courage to look at my 401(k). When I did, there was no shock: Yes, my balance had dropped. Then I checked the difference from Jan. 1. It’s hardly changed. Perhaps I’ll sleep tonight.

My good fortune—so to speak—resulted from my mix of 40% stock funds and 60% bond funds. I’m 76 years old and have been retired 10 years, but I don’t rely on my 401(k) for income, because I have a pension, as well as Social Security. I like growth, but I dislike going backwards even more. Hey, this diversification thing seems to work.

My 401(k) is less than half my investment funds. The rest includes a few stock mutual funds, two utility stocks and some municipal bond funds. An expert looking at my investment choices might have a “what is he thinking?” moment. I’ll admit to running on instinct. Still, my seat-of-the-pants strategy has allowed my 401(k) to grow by more than 50% since I retired, even after those darn required minimum distributions.

Could I have done better? Perhaps. But I could also have done far worse.

Few retirees these days are in the desirable position of living on a pension and Social Security. Likewise, not many people would follow my investment strategy, nor should they. When it comes to investing, especially the retirement kind, we’re all unique. The guidelines for investing that use things like age and years to retirement are fine, but they don’t consider the illogical factors that influence all of us. I once blindly followed professional advice, and my wife and I ended up with some deferred annuities that I still don’t fully understand.

That said, I believe most people could benefit from some professional guidance. But you need an advisor who understands you—and you need to understand yourself:

  • When an advisor asks about your risk tolerance, think seriously before answering. What actions did you actually take during the stock market collapse of 2008-09? Did your actions match your supposed risk tolerance? My sense is that most investors have very little tolerance for seeing their money disappear, regardless of what they claim.
  • Walk away from any advisor who doesn’t take the time to understand you personally before he or she makes investment recommendations. Even if the advisor’s suggestions are perfectly logical, they’re no good if they ignore your hopes and fears.
  • Much of the general advice available is for the average or typical person. If you ever meet one of those, let me know. One size does not fit all. We vary enormously in how we think about money, our spending priorities, how we define necessities, and what makes us happy and fearful.
  • Work hard to develop a long-term view of investing. What happens day to day, month to month and even year to year shouldn’t, by itself, trigger investment changes. I still feel employers did a great disservice to their workers when they not only went from monthly to daily valuations in 401(k) plans, but also allowed employees to trade every day.
  • Above all, keep calm and carry on, whether you’re 26 years old or 76. Panicking at any age can be costly.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Brain Meets MoneyCount the Noncash and It’s a Stretch. Follow Dick on Twitter @QuinnsComments.

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