The $64,000 Question

THE $64,000 QUESTION

John Lemon: ‘As a result of your concerns (as well as those of Mogambo) about the national debt and the future of our economy, are you beginning to rethink your longstanding advice to young and middle-aged people to regularly invest in equity index funds?’

☞ Yes and no. With an emphasis on no. The yes part is easy: there’s lots to be concerned about. America’s financial position is growing increasingly precarious. We are borrowing most of the world’s savings rather than saving on our own – and for what? To finance oil imports that we burn into thin air; to finance tax cuts for our wealthiest citizens. Well, you read all that yesterday and the day before.

The ‘no’ part comes in several pieces:

These concerns could be ill-founded. Things could go better than expected. That would be good for the periodic investor in index funds.

I’ve long recommended that these regular monthly or quarterly or annual investments be not just in domestic funds, but perhaps a third or more in international funds. That could help the periodic investor.

Over the long run – and it can be very long – the market tends to price its wares in such a way that it rewards investors for taking their risks. Not always, and certainly not with every stock (or risky bond); but over time, and over asset classes, the least uncertain – e.g., the 90-day Treasury bill – offers the lowest return. Risks wisely taken, and by those with the staying power to wait, and the resources to diversify and spread that risk, tend to reward their risk takers. (This is one reason the rich get richer; they can afford the risk.)

By investing periodically and steadily, you get the benefit of dollar-cost averaging . . . buying more shares when they’re cheap, fewer when they’re dear (because $1,000 will buy only twenty shares of a stock at $50 but fifty shares when it falls to 20), so in the long-run, the odds are stacked in your favor.

(Say the stock – or, in the case of index funds, ‘the market’ – see-saws equally above and below $50 for a long, long time. And ends up at $50. It was $50 in 2005 and it’s $50 in 2030. You’ve gotten nowhere! But actually, on top of any dividends along the way, you would have done well. Just how well depends on the frequency and amplitude of the fluctuations around that $50 price. But the concept is clear: you bought a lot more shares below $50 than above $50, so taken together you have a nice profit.)

Historically, ‘you gotta be in it to win it.’ Market gains tend to come in spurts, unpredictably. If you try to ‘time’ the market, you could very well miss much of the growth.

There’s much to be said for not breaking the habit/discipline/routine you’ve developed. If you have found a way to shunt 10% of your pay (say) regularly and (by now) painlessly (because by now you barely notice it, having come to accept the notion that you live as if you earned 90% of what you actually do) . . . why break a good habit?

But might it be wise to up from 33% to 50% your allocation to international index funds? It might. And is the problem more complicated as you get older? It is. If you’re nearing the time that you’ll be taking money out of your fund rather than putting more in, you would want to rethink the proportion on your total pie you’ve committed to equities.

So maybe what it really comes down to, as I try to weasel out of your very good (nay, $64,000) question, is how you define “middle-aged.”

WHERE TO DONATE THAT OLD COMPUTER?

Click here. They can often match what you have with the needs of a local group that will pick it up from you.

PRIVATE ACCOUNTS

There are just so many reasons not to borrow trillions of dollars from the Chinese and Japanese to fund President Bush’s proposed Social Security partial privatization.

A brief excerpt from one more:

The Post’s Jonathan Weisman quotes both Jeremy Siegel, a stock market enthusiast, and Kevin Hassett of the conservative American Enterprise Institute in support of Shiller’s views. All three agree that balanced investment portfolios are unlikely to earn 3% a year over the next few decades. . . .

Bottom line: any kind of prudent investment is likely to leave a lot of people worse off than they are under current Social Security law. As with any financial scheme, you should be mighty cautious about signing on the dotted line when you’re dealing with a fast talking huckster who’s seems a little too eager to sell his goods without giving you time to read the fine print.

WAKE UP AND SMELL THE COFFEE

Longtime readers of this page will know we have long-since answered which came first, the chicken or the egg. (Hint: the egg.) But what about this? Do we wake up and smell the coffee? Or – smelling the coffee – do we wake up?

I lean toward the latter. After all, think of smelling salts. I have never seen or to my knowledge smelled smelling salts and don’t know exactly what they are. But they appear frequently in literature, for reviving fainted ladies. Swoon; sniff; revive. Everyone seemed to carry a vial, just in case. So isn’t it really, ‘Smell the coffee and wake up!’ ?