The modern academic used to have a definite life cycle. You started out as a graduate student on a paltry stipend, eking out an existence on lentil soup and twice-used tea bags while pondering Aufhebung in the writings of Georg Wilhelm Friedrich Hegel. Then you landed a starting professorship and were magically bestowed with health benefits and a retirement account. On lazy afternoons, you lectured to hung-over sophomores about the negation of the negation. Finally, you started to earn real money, at precisely which point you were expected to retire and live on lentil soup and twice-used tea bags in order to make way for the new generation of Hegel scholars. This was called telos.
That tranquil scenario, already under strain as countless adjunct instructors never achieved health and retirement plans, has been all but destroyed by the Great Financial Meltdown of 2008 (The Chronicle, December 19, 2008). Now even many senior faculty members wonder if they will ever be able to retire.
Pennywise's in box overflows with tales of despair. "Many of my colleagues are shellshocked," writes an emeritus professor of engineering in Maryland. A theater professor in Los Angeles reports seeing her "TIAA-CREF portfolio whirl down the drain, as in the shower scene of Psycho." A Tennessee physicist states that he and his wife "followed the age-old wisdom and stayed invested all year" at a 60-40 equity-bond ratio, only to see their nest egg plummet 30 percent, endangering their goal of retiring in four years in their early to mid-60s.
What to do?
First, stop looking backward. Psychologists say that loss makes a more indelible impression on our minds than gain. The recent financial events are a veritable tsunami of loss. Of thousands of stock funds sold nationwide, each one lost money in 2008, according to the independent investment-research company Morningstar. But pining over your old account balances is as sensible as pining, 30 years on, over old high-school crushes.
Looking forward, however, presents its own difficulties. The small investor is in a bind. After decades of speculative excesses, the recent crashes laid bare a bacchanal of double-dealing. One bubble after another has burst: dot-coms, telecom, real estate, commodities. Chicanery was endemic, with episodes like energy-giant Enron's book-cooking and Bernard Madoff's alleged bilking of $50-billion from the likes of Yeshiva University and the New York University School of Law. Short of a powerful wave of new federal oversight and internal corporate reform, including elimination of stock options and other practices that give executives an incentive to dissemble, it is hard to imagine trustworthiness ever returning to capital markets.
But to sell in disgust now might be the mistake of a lifetime. We Americans, made giddy by Wall Street's short-term movements, think in absurdly short-sighted ways. We dash in one direction salivating with greed, then turn and dash in the other in pure panic. If the market goes up, we buy. If it goes down, we sell. Adam Smith held the opposite: Buy cheap, sell dear. On that score, at least, it is hard to argue with Smith.
We might do worse than to reread the Phenomenology of Mind and think, in, well, Hegelian fashion. I refer to the concept of totality. Don't think of one year's performance, one fund, or one asset class, but of all of your holdings as acting in concert across the span of your career. To restore rationality, forget the twitches of the market. Instead, begin by determining your time horizon. When will you need the money? How long will you need it to last?
Retirement can last a surprisingly long time. Even if you are close to it, you need to think long term, because the longer you live, the more your life expectancy increases. If you are 55 and female, for example, you are expected to live to 82, even though the average female life expectancy is 74. (Consult the Social Security actuarial table at http://www.ssa.gov/OACT/STATS/table4c6.html.)
That should be reassuring. A long horizon puts compounding to work. It provides abundant time for your portfolio to rebound — if not in five years, then 20. However, it may also suggest the need to start saving a great deal more. Are you taking advantage of your college's full retirement match (The Chronicle, January 16, 2008)? Do you have a supplemental retirement account? A Roth IRA? Extra-large contributions to such accounts are permitted for people 50 and older.
If you're in your 50s or 60s and have suffered recent outsize losses, another option is to push back retirement, perhaps even to 70. That is the sweet spot for maximum Social Security benefits, a big help should you enjoy exceptional longevity. The extra work years would also enable you to accumulate more savings and provide more time for your existing holdings to appreciate before you must tap them.
After a year in which major stock indices fell by almost 40 percent, however, the meaning of risk has been brought home profoundly, making many people skittish. Should you abandon stocks? Should you put everything in money-market funds or treasury securities? What is safe?
Alas, there is no sure thing. Ultrasafe treasuries are now expensive and yield little. Certificates of deposit could lose out if inflation reignites, which is not impossible in an era of anticipated trillion-dollar deficits. Everyone knows stocks are risky, but few realize it is just as speculative to keep everything in cash and government bonds, given the risk that inflation or a declining dollar might destroy your money's value.
This may very well be the time to buy stocks. If anything else were to fall by 40 or 50 percent or more in price, we would view it as more attractive, not less. The renowned bargain-hunter Warren Buffett is buying. All the same, no one can predict where we will be in one, five, or 10 years. No one can call the bottom. No one has a crystal ball for inflation or deflation. No one can gainsay the potential for further financial scandal. No one knows whether cash, bonds, or stocks will produce the best returns. No one.
That is why diversification remains essential. Your portfolio should include all major asset classes: equities (stocks, both domestic and international), bonds (including some linked to inflation), and cash (money-market funds or CD's). Diversification distributes risk and reduces volatility. For most investors, low-cost index funds — which track broad markets — are the most rational way to invest in these asset classes.
Also critical is asset allocation between equities and fixed income (bonds and cash). Plain-vanilla formulas like 60-40 or 50-50 may suit you, but consider Pennywise's patented method: Take your age, subtract 10, and use that number as the ideal proportion for your fixed-income allocation, adjusting after every birthday. At 65, for instance, you would hold 55 percent cash and bonds to 45 percent equities. That is just a target; don't fret if your portfolio diverges by up to 5 percent. But when adding new contributions, use them to recalibrate. Sound too complex? You'll do perfectly well with a constant ratio such as 60-40 or 50-50. The main point is to have a system that compels you to buy low while limiting your exposure to severe correction in any one asset class.
Some of these concepts may be a bit difficult for beginners. Not to worry. In future columns, we'll unpack them.
Here is what matters most: The two key variables in retirement-saving success are disciplined input and asset-class diversification. Put aside fantasies of being able to know "the best thing to invest in now," keep contributing, spread it around, and you will have the best chance of achieving a sound retirement. Godspeed.