Fear Economics - The Sky is Falling

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In the news and the blogs there have been a series of reports, valid or not, that the world is looking at a global economic downturn of significant proportions. While this maybe true or not, one thing to note is more Americans control their own retirement accounts and are subject to choice and market conditions. Are we setting up an economy of fear? Riding the wave of emotional sentiment when your retirement future is bouncing on a VIX 100 foot wave fear and uncertainty sea is no way to build a secure social safety net.

According to MSN money (EBRI), in 2005, 37% of all workers had a traditional pension. In 2007, the number was reported to be 29%.

IRAs now account for 25.5% of all retirement funds.

During the Dot Con Crash untold losses in stock based retirement plans occurred. What is more amazing is I spent a good two hours looking for the total loss estimates on 401ks during the 2000-2003 time frame and amazingly enough could not find the data! Story after story of individuals wiped out, unable to retire, looking for work, but aggregate estimates....none to be had!

In other words, today's retirement amounts to each person having to be a economic and market expert. It's the luck of the draw which enables one to retire. Somehow I don't think your average American has the financial savvy or the luck to guarantee retirement under these conditions.

So, what's the current answer? Plain don't panic and do not act on emotion. Do your homework and also write your Congress representative. Being forced to place our bets in a retirement game of Russian Roulette just to obtain retirement financial security is an outrage Americans really shouldn't stand for anymore. We're truly in a sucker's game.

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You Suck at Investing

John Bogle of Vanguard Funds fame wrote a compelling article about just how awful individual investors are over time. Here's an important sample:

The returns incurred by the average equity fund investor since 1984 have averaged just 2.7% per year, a shocking shortfall to the 9.3% return earned by the average fund. The result is that the average fund investor has earned less than one-quarter of the stock market’s 12.2% annual return. Compounding these annual returns over the 1984-2002 period presents a dramatic picture of the plight of the typical mutual-fund investor: As the chart nearby shows, $1,000 invested at the outset would have produced a profit of $7,910 in the stock market itself, a profit of $4,420 for the average equity fund, and a profit of just $660 for the average equity-fund investor.

What really stands out is that the average mutual fund investor only earned 2.7% a year during that time.

Simply put, you suck at investing:

It is a principle of American life—practically gospel—that you know better than anyone what to do with your money. The idea of privatizing Social Security is based on the notion that you'll invest your savings better than the government would. The ascendance of 401(k) plans over guaranteed employee pensions has the same foundation—that employees will make informed and prudent decisions when they invest.

[It's Not True!]

This is a problem that is beginning to be recognized. Since 1964 Nebraska offered state employees the chance to manage their 401(k)-type plan. Extensive employee education and training seminars were given, and everyone expected outstanding investment returns. But when the state audited the program in 2000, the results were incredibly discouraging—employees were making bad investment after bad investment. So in 2003, Nebraska eliminated employee choice from its 401(k) plan.

Pension funds directed by trustees achieve results that are about 50 percent better than those achieved by individual investors—even though trustees are not professional money managers. So why do individuals invest so poorly compared to institutions? ....
individual investors commit[ ] the classic market sin of chasing performance.... Individual investors ... pour their money into [high flying market sectors]. History shows today's high-performing funds are tomorrow's laggards, so individual investors are choosing investments that are likely to disappoint. Similarly, research shows that individual investors tend to sell securities that will have the highest future returns.

....[Also], Individual investors don't purge their bad investments, allowing poor performers to pile up in their portfolios. Pension trustees also do better because they usually engage professional advisers or consultants to help them make decisions.

The final reason individual investors do relatively poorly is ...trustees behave more rationally than individuals not because they are more financially sophisticated, but because they are more scared. Trustees have to answer for their decisions to a superior or a committee. It is very hard to hold a money-losing investment if your boss is holding you partially responsible for it....

So does this mean 401(k) plans are a mistake, that individual investors are doomed to earn poor returns on their stock market investments? This is an important question for policy-makers to consider.... If employees are earning only half of the market averages, that means that in coming decades, there could be serious shortfalls in income for retirees....

Articles like these demonstrate with brutal facts why Social Security must never be privatized, and why individually directed 401k plans are doomed as a retirement vehicle for average workers.

The classic defined-benefit pension plan may not be making a return, but employees should demand portable defined-contribution pension plans with a minimum guaranteed return. Professional management of a group's assets are far more likely to yield superior returns over the long run, and is a much more suitable retirement vehicle. Mandating such plans should be part of a progressive or populist agenda.

I do suck, it's true!

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:) I think it's absurd to dump off of people trying to manage such complex investment instruments, which they do regardless by these methods. It becomes yet another blame game as a method to psychologically put people as the other....well, so and so is too stupid (and thus deserves x) or so and so didn't exercise (and thus deserves to get cancer) or so and so didn't pay attention (and thus deserves to lose their career). It's like a gigantic survivor game and I've often wonder if all of these psycho reality shows are corporate sponsored, trying to convince Americans that this is all normal as a society.

I've paniced long ago

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Seven years ago, when I got laid off less than two months after 9-11, I was in panic. Now I see the truth- that I personally am too far outside of "normal society" to count on capitalism OR socialism for my and my family's well being.

So I came up with a strategy based on fear and absolute worst case scenario for me.

And here's my panic strategy that came out of that:
1. Get rid of credit cards - never use them or loans from the bank again. I'm within one big windfall or one year of paying them off and we've readjusted our lifestyle to debit card purchases instead.
2. Refinance the house to a fixed rate- did that during my 4 years of employment between 2004 and 2008.
3. Hoping to achieve this one next time I'm employed- deal with insurance agents to build a comprehensive, full value of my lifestyle, unemployment insurance plan- including unemployment insurance to cover health insurance premiums.
4. Start work on creating a tourism-based, 0 net energy, subscription permaculture food & energy farming project instead of a retirement fund. If I do it right, it will still provide for my retirement; and a few other people's as well, while keeping my money local instead of sending it to the big con artist banks and financial institutions back east. Doing it right means using my tech knowledge to automate the whole thing as much as possible, and prepare for the worst (for instance, even though some of the best farmland around here is 200 feet or less above sea level, I'll want something that is at least 400 feet above, due to worst case global warming predictions). I'll also be looking into farms that fell into the subprime mortgage trap- because around here, the banks usually fall into the mistake of not keeping up the property taxes, and the land gets seized by the local government and auctioned off cheap.

Yes, the sky is falling- but when it falls, there are always opportunities for those smart enough to take advantage of the sucker's game.

OTOH, if all of the suckers were smart enough to see this, I wouldn't give the NYSE more than five months life- because NOBODY would be gambling there anymore with those crooks.

Anonymous, market-based investing is betting in a race you aren't running in and can't win. ONLY if you are in the race can you win it.

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Maximum jobs, not maximum profits.

Don't panic

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but if you are going to panic, Panic First!

At least that is how I've always heard the saying. ;-)