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Retirement Savings: We Call it a “Nest Egg”

It’s called a “retirement nest egg”.  The idea is that we would nurture and protect our retirement savings like a bird nurtures (and sits and nests) its eggs.  Get the imagery?  So, if it is a “nest egg” and we should be nurturing and protecting our retirement savings then why the hell do we put any of it in the stock market?  What I am about to say is NOT investment advice but something to think about.

Are stocks too risky for our “nest egg”?  Hell yes but if you look at 401K offerings and advertisements targeting retail customers you would think our only options are stocks.  Far from it.  In light of the financial crisis I believe we have to rethink how we save/invest for retirement.  The old rules don’t apply anymore.

Did you know that bonds (the boring and forgotten sibling of stocks) have matched the investment performance of stocks over that last 40 years and with less risk? 

Source: Are Bonds Going to Outperform Stocks Over the Long Run? (registration required)

So why the stock crazy?  Well, it’s based on the idea that over time - a very long time - stocks will out perform other investments.  Oh really, but what about the volatility and other risks.  What if it’s your time to start lowering your portfolio allocation of stocks because you are closer to retirement and the stock market recently tanked and so did all your stock investments.  This a situation that many Americans are experiencing now.  A bad situation - either you have to postpone retirement or bite the bullet and retire with a lot less savings.

Financial advisers have been taught and tell their clients that a person who has a long time horizon can weather the volatility in the stock market.  But they don’t have a crystal ball they can’t predict where the stock market will be when it’s time for the client to start selling off stock portfolio.  Sure the stock market can offer very high returns but there remember the relationship between risk and returns - high returns means high risk.  I don’t think stocks are worth the risk for our nest eggs - and yes my views on this matter have changed (I used to believe what I was taught). 

Let me end with the following excerpt from the article “Bonds: Why Bother?”:

Many cherished myths drive our industry’s equity-centric worldview. The events of 2008 are shining a spotlight, for professionals and retail investors alike, on the folly of relying on false dogma.

  * For the long-term investor, stocks are supposed to add 5 percent per year over bonds. They don’t. Indeed, for 10 years, 20 years, even 40 years, ordinary long-term Treasury bonds have outpaced the broad stock market.
  * For the long-term investor, stock markets are supposed to give us steady gains, interrupted by periodic bear markets and occasional jolts like 1987 or 2008. The opposite—long periods of disappointment, interrupted by some wonderful gains—appears to be more accurate.
  * For the long-term investor, mainstream bonds are supposed to reduce our risk and provide useful diversification, which can improve our long-term risk-adjusted returns. While they clearly reduce our risk, there are far more powerful ways to achieve true diversification—and many of them are out-of-mainstream segments of the bond market.
  * Capitalization weighting is supposed to be the best way to construct a portfolio, whether for stocks or for bonds. The historical evidence is pretty solidly to the contrary.

As investors become increasingly aware that the conventional wisdom of modern investing is largely myth and urban legend, there will be growing demand for new ideas, and for more choices.

We need a new way of thinking!