By DAVID MOON, Moon Capital
February 17, 2008
Two things happen as a
person approaches retirement. First, he gets excited about all of the things he
is going to do with his newfound free time: Fish. Play with grandkids. See if
Bob Dole's pharmaceutical advice is really any good or not. Things like
Those things are good.
Some impending retirees do another thing:
They sell all of their stocks and move the proceeds to bonds or
This...not so good.
Their rationale goes something like this:
'As long as I was working, I could withstand a loss in the stock market; I had
years to make up for it. But I'm only six months away from retirement. Anything
can happen over this short a time period.'
If the return on the stock market during
the next 180 days affects the plausibility of your retirement plans, quit
worrying about your asset allocation. You're not financially ready to retire.
The stock market is going to decline 20 percent, perhaps in a period as short as
six months. It might not be in the next six months, but over the next 20
years, the market is going to have some nasty declines.
If you're going to retire in six months,
your investment horizon isn't six months. If, however, you plan to die in six
months, then maybe your investment horizon is six months ' but only if you don't
have any survivors to support.
You may have heard old rules of thumb
that assist investors in unemotionally reducing their exposure to stocks as they
get closer to retirement and throughout retirement. Of course, these rules of
thumb completely ignore individuals' specific situations, such as their income
needs or whether or not they are going to choose to pay for their kids to go to
college until they are 35 years old.
One popular rule of thumb is to determine
an appropriate amount of your portfolio to put into stocks by subtracting your
age from 100. If you are 65 years old, you should put 35 percent of your
portfolio in stocks.
Huh? My kids are seven years old. Why
should they own anything but stocks? Why should a 50-year-old, maybe 15 or 20
years from retirement, consider putting as much as half her retirement plan into
Some other sources suggest subtracting
your age from 110, not 100. This would require my children to open a margin
Other rules of thumb suggest that there
are certain fixed allocations that are 'safe' (perhaps 20 percent stocks and 80
percent bonds), 'moderate,' and 'aggressive.' These terms don't take into
account things like the value of various asset classes at any particular time.
What kind of bonds do you mean? Long-term bonds? If interest rates are low and
in danger of increasing, it is entirely possible that long bonds might be much
riskier than many stocks.
An old wives' tale tells us that the term
'rule of thumb' originated from a 1782 British law that allowed a man to beat
his wife with a stick as long as it was no thicker than his thumb. Fortunately
for petite wives of large-thumbed husbands everywhere, there is no record of
such a law ever existing.
The stick, however, should be used on
whoever uses old tales to make asset-allocation decisions or
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).