Financial Advisors don’t Understand Baby Boomers Need to Avoid Large Losses

I don’t think the message is getting through to financial planners any more than it is getting through to bay boomers. That message is Baby Boomers have to observer and respect Rule #1 – Avoid Large Losses in Retirement.

Chasing high returns by having a high proportion of your money invested in equities (risk-based assets) makes no sense when you are in retirement and especially in this market. I’m talking here only about money set aside to be your nest egg. If you have done that and have surplus money then be my guest, try and make a killing in this market using the surplus money.

Remember it is not the fact that the market is down that is the problem. It is the size of the losses you incur and the time it takes to recover those losses that will affect you directly, especially when you are not adding to your nest egg but taking from it in the form of a pension.

Many Baby Boomers have realised this and are moving their money out of risk based assets into safe assets like bonds, term deposits and cash at the bank. This would seem the logical thing to do for the immediate future.

But many financial planners say this is all wrong. If you have a plan you should stick to it. Even if the whole of the financial world is crumbling around you and the financial institution are changing their plans by the minute, Baby Boomers should stick to their plan.

Here is one example of a well-meaning financial advisor that may not know the difference between accumulation and distribution of a nest egg.

“The current economic slowdown is not a cause for panic among those with a clear retirement plan and sound investment strategy,” says Jim Bell, founder and president of Bell Investment Advisors. “The key to navigating the slowdown is to remain rational and stick to a plan, rather than letting emotions steer you off track. An economic slowdown is measured in months in contrast with retirement, which will last several decades for most boomers.”

This is yet another example of the financial world trying to make us feel guilty for doing what comes naturally – protecting ourselves from large losses. What about that confidence too. How do they know that this time the economic slowdown will not last years like it did in the 70’s.

I’m not being a gloom and doom merchant here. I’m just saying no one knows and so you should always take the cautious approach and protect your nest egg since you cannot easily replenish it when in retirement and taking a pension.

They go on to say:

“Unfortunately, these investors are actually putting their retirement at greater risk, since bonds and money-market funds have trouble keeping pace with inflation,” Bell notes. “Bonds and cash have the false allure of ‘safety’ since their principal fluctuates less than that of equities, but equities, along with commodities, will better allow boomers to maintain their standard of living over decades. Boomers must learn to live with the volatility of equities, if they want to keep their purchasing power in tact.”

This is a very dangerous statement. An evening with Baby Boomers who retired in early 2000 might change his thinking if they get out alive.

Al Thomas of Mutual Fund Magic recommends putting your money into cash or other safe investments at times like these. He says when the market drops and you are in cash you have what he calls a “reverse profit” in that you have not suffered any stock market losses. So that money will still be available to you to invest when good time return. He also add 1-2% return from safe investments beat a 40% loss on your money by sticking with the plan to buy and hold.

I’m not saying that having some of your money in equities is wrong. I’m saying when the markets are as volatile as they are now, when there is a credit crunch that almost stopped the world financial system, when millions of houses are on the market at huge discounts, when the FED’s are bailing out major banks and when huge banks like Citigroup are laying off 17,000 people, it might just be the right time to call your financial planner and review his plan for your retirement and make it your plan for your retirement.

That review should include reducing your exposure to equities and putting your money in a safe place for a while. A measly 2-3% returns from bonds can be very attractive when the alternative of buy and hold, staying in the market could be a 40% loss of your nest egg capital.

There will come a time when the markets will go quiet and stability will return. That will be the time to review the plan and consider investing in equities again.

They tell you not to time the market but at the same time tell you the markets looses money every 5-7 years and not to worry about it. So why don’t they take us out of the market every 5-7 years so you don’t lose any money, if they know it is coming? And if these down-turns only last for a few months what is wrong with being in cash for such a short time? They are the professionals – it should be easy for them to do.

So please don’t be intimidated by your financial planner. Review your financial plan and reduce your exposure to risk based assets for now. Cash is a position. Always review a plan if there are significant changes in the markets for whatever reason. If you can put in stop losses do so. If you have losses larger than 10% you should watch to see if this mini-rally holds and either reduce your positions or put in stop losses ready for a likely pull-back and retest of the lows. Always remember Rule #1 – Avoid large Losses.

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