Is it smart/ever smart to get completely out of the stock market at a certain age?
I am not worried about earnings — I am concerned about protecting my principal. At age sixty-five, I don’t have a lot of time to recover from another hit. I barely survived 2000 and 2008-9. I do not intend to take my Social Security until age seventy. I am getting survivor benefits now which I am banking 100%. I am living on my investments and feel like I have enough to last me.
Thank you for your attention.
CMB, PTP here. What we’re looking at is a classic investment objective conundrum. Your investment objective doesn’t match your investments, thus you are feeling apprehension set in. We’re going to take some time to explore exiting the stock market altogether, and then we’re going to separate your fears from your investment objectives.
“Should I leave the stock market behind?” is one of the more common questions of pre-retirees. But in order to answer the question, for any one individual, a number of questions must be answered by the interrogator himself.
The questions you should be asking yourself are these:
•Can you achieve your financial goals without taking market risks?
•Can you achieve your financial goals without the returns that sometimes come with market risks?
•Can your financial goals be waylaid by inflation?
•Are you subject to other types of risk by not participating in the stock market?
I think it’s a ridiculous notion that someone must participate in the stock market in order to experience financial success. Two of my good friends have built million-dollar sums of wealth, without ever participating in the stock market, receiving an inheritance or selling a business. In each case, they refused to subject their money to stock market risks and, in turn, dealt with both the positive and negative consequences of their decisions.
You don’t have to be in the stock market at all. You just don’t. However, if you choose the stock market abstinence path, you must be willing to deal with the consequences.
Don’t let that come off as a negative statement. Every decision has consequences of varying severity. When you forgo investing in the stock market, you undoubtedly abandon the ups and down, but you also abandon the ability to easily keep pace with inflation. Inflation erodes the buying power of your money. Simply put, $10 in 2015 buys you a lot less than $10 bought you in 1995.
If your money is earning 0.5 percent return in a money market account, bank account or certificate of deposit (CD), yet inflation is clipping away at 2.5 percent per year, your buying power is getting eaten alive. By the way, inflation has been about 1.5 percent over the past couple of years.
Sometimes inflation can destroy a retirement plan and create major cash flow problems. And sometimes inflation’s effects are paltry and insignificant. If inflation doesn’t objectively seem to be a threat to your retirement plan and you don’t need some of the higher returns and risks the stock market has to offer, then you can probably remove your money from the market.
Now, let’s take a deeper look at investment objectives.
Common investment objectives include capital appreciation (growth), capital preservation (safety), income, tax advantage and inflation protection. When investors decide what to invest in, it’s imperative they come to grips with what they are actually trying to achieve.
The default objective has morphed over the years into capital appreciation (growth), for a number of different reasons. In my opinion, this default objective has confused investors who don’t actually consider capital appreciation to be their top priority.
Additionally, when an investment objective isn’t communicated to or discovered by a quality financial professional, then a recommendation born from capital appreciation can occur. That’s a major problem. Then you’ll see people taking market risk for absolutely no reason.
A good financial adviser will not only sniff out your investment objective but will make sure you are invested in accordance with it. A not-so-great financial adviser projects his or her own risk tolerance and/or investment objective onto a client. Then, disasters occur. Sadly, I’ve seen this happen quite often. If a person expresses an unwillingness to take risk, yet an adviser starts quoting stock market history in order to keep the person in the market, then capital preservation is being ignored.
CMB, based on your comment, “I am not worried about earnings — I am concerned about protecting my principal,” I would definitely recommend you remove yourself from the market. If you don’t care about the upside, yet care greatly about the downside, then it’s time to match your money with your true investment objective: capital preservation.
Have a question for Pete the Planner? Email him at firstname.lastname@example.org or visit www.petetheplanner.com.
Pete the Planner
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