Mutual Funds Intimidate Baby Boomers and Investors

Many Mutual Funds are now seeing their total funds being reduced dramatically by stock market losses and investor redemptions. In order to stop the redemptions Mutual Funds try to intimidate Baby Boomers not to do anything to protect their nest eggs in retirement.

I have taken some statements from the newspapers to make my points. Unfortunately most financial commentators think the same way and have a similar view on investing as the fund managers they write about. But rather than get into arguments with the writers I’d rather try and promote a different view. I want to win the war not just a battle.

Their liberal use of the phrase “Investors should not panic” without any qualification is probably one of the most flagrant ways they intimidate us. First of all if an investor uses a rational investment strategy and exercises stop losses when triggered to exit the market this is panicking by their definition. Even though this may be a well thought out strategy designed to minimise losses and a recognition that the market has proved your investment strategy wrong. There is no loss of face here because the investment didn’t work out. Just forget it and move on.

You must be strong and stick with your plan to minimize losses when in retirement. However far too often you are made to feel like a coward if you sell and so you stay in the market and watch your nest egg drop 30 or 40% as it did on 2000-2003.

It is not panicking when you exit the market to minimize losses. It is very sensible if you are in retirement – I keep qualifying it because it is important to make the distinction.

If you let those losses grow well in excess of where it is reasonable to get out and protect most of your capital and then sell – that is panicking because it is too late and will seriously damage your nest egg.. As an retiree a maximum loss of 10% may be a good rule of thumb. But you need to decide that for yourself.

Here is another statement that is of concern and should be analysed:

“Stick to the Plan and if you have invested in the right funds with the right asset allocation then short term losses are still to be expected”.

Just who decides how the asset allocation is done? I doubt whether it is you. You are likely to leave that to your financial planner because you have no idea what is the right fund or the right asset allocation. This implies there are wrong funds. If so why are they being marketed and investors put into them?

Remember though the vast majority of financial planners have no idea which funds are likely to perform best in any one year. What is more to the point for a Baby Boomer in retirement is they don’t know which ones are likely to lose the most in a down turn.

It’s very much pot-luck or fund-of-the-month when they come to select them. No one knows if you are in the right fund until after the fat lady sings! Only hindsight will tell you it was the right fund until then it is an investment that might give you a return or a loss. So you need to protect yourself if your financial planner is wrong. It’s your money.

Another statement worth looking at more closely is:

“If we are told more clearly and concisely where our money is invested, why it’s being invested there and what we can expect from it while it’s invested, then we are less likely to make rash or unwise decisions when the losses occur.”

There are several concerns with that statement too.

It seems to imply that the “all knowing and all seeing” financial adviser can explain to us exactly why they are investing our money in a particular fund. They are even able to tell us what we can expect from investing in that fund. But hold on a minute, just when we think our financial planner had everything worked out they tell us not to make any unwise decisions when losses occur.

That implies they expect losses to occur doesn’t it? If so what is rash and unwise about having an exit strategy if the “omnipotent one” has selected the wrong funds? Notice I said selected the “wrong funds” rather than saying if the “selected funds” failed. The omnipotent one would have selected the “right funds” and so we must hold on until it becomes the right fund or is no longer a fund due to excessive losses. A mere mortal might have selected what looked like a good fund to invest in and if it proved them wrong they would have exited it via their stop loss.

One thing too is they talk quite sensibly about losses occurring. But they don’t talk about the size of the losses or the length of time to recover those losses. These tiny details will determine whether your nest egg will survive in the long term after an inevitable loss. So please remember its not the loss occurring that is the problem, it is its size and longevity.

In closing what is a rash and unwise decision in this case? Is it rash and unwise to stick with the plan that hasn’t worked out and maybe watch our nest egg disappear? Or is it rash and unwise to exit the fund admitting it didn’t work out as planned, limit your losses and look for another investment opportunity or even standing aside until one presents itself?

What would you do in retirement? I know what I’d do because I have done it.

2 Responses to “Mutual Funds Intimidate Baby Boomers and Investors”

  1. DR says:

    Hi David,
    You really do get the message across. I had a preliminary chat with a Financial Adv earlier this week and for the first time, I could see clearly how his proposals would jepordise my nest egg.
    1-suggested that I keep 15% in risk free deposits
    2-spread the balance across 4/5 different funds from four different companies to reduce volatility- though graph for each showed parallell trends, above and below zero.
    3-an amount, equivalent of 1.5% of total nest egg, to be lodged to my funds as a “gift”

    Had I not become an avid believer in OTR, TTP, RIN and ETFs, I would have been pleased with the advice.
    Regards, DR

  2. admin says:

    DR, thanks for the vote of confidence.

    I’m glad my Posts have helped you objectively evaluate your financial planners advice.

    I believe if you have consciously thought through an investment strategy using some of the objective tools I have found on the internet then you are well placed to manage your nest egg in retirement.

    If you can find a financial planner that will work with you so much the better. I believe we still need a financial planner to keep our strategy going as we get older and may not want to bother with it. But my idea of a financial planner – not the bulk of the ones that are out there today.


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