Embrace the Risk, or Remain At Risk (Commentary)

Do you want to run out of money during your retirement? Do you think the stock market is too risky? You can’t have it both ways.

If you are saving for retirement or any long-term goal, there are really only two types of risk you can assume. You can embrace risk now (being in the stock market) or you can embrace risk later (the possibility of running out of money before you die). Many people take the easy road and assume the latter risk. After all, retirement being 30 years away occupies not nearly the “top of mind” space that the six o’clock news does with all its drumbeat of stock market gyrations.

“Stocks are too risky for me,” you say? Garner Asset Management’s counter argument to this is that inflation is too risky. We counsel our clients to embrace risk now for a variety of reasons. First, it’s the right thing to do. Second, you have many earning years ahead of you to “invest” yourself out of any short-term market correction. Third, we will not suggest anything to our clients that we are not doing ourselves.

To be comfortable embracing the volatility of the stock market, you must understand risk in context. This happens through education — education of ourselves in studying the market and it’s long-term risk profile and education of our clients by explaining the positive implications of a long-term investing plan.

Meld these two things together and suddenly you have an elegant solution of planning for long-term goals and at least an understanding that the “now risk” is not a negative thing. It’s only negative to the extent it gets in your head and causes chronic market myopia. However, that’s a condition not easily overcome. It’s all too easy to have this short-sighted affliction when your favorite stock missed earnings by a penny, is down 20 points and CNBC is hammering away.

The antidote for chronic market myopia is to become educated and develop your vision and conviction prior to actually putting your money to work. Investors must develop a complete comfort level in where they want to be in 20 or 30 years, not just the next quarter. Conviction is what allows investors to reach long-term goals under the media barrage of information, most of which is “white noise” at best.

Since 1926 the best return for large company stocks for a one-year holding period was 54 percent. By comparison, the worst single year since 1926 for large company stocks was negative 43 percent.

Before you bail out, let’s explore this further. For 20- year holding periods, the best annualized return was 18 percent. The worst was a positive 3 percent.

Conviction plus long-term investing equals success, at least historically. What’s the theme in this? If you’re in stocks for a year or two, you need to be doing something else. If you have conviction and long-term vision, keep it up, you’ll get there.

How does this relate to risk now or risk later? Inflation, even at 3 percent, would double consumer prices in less than 25 years. That meal out with your family that now costs $50 will be north of $100 during your retirement. The purchasing power of your $100,000 portfolio will be less than $50,000 during your retirement. Let’s don’t even talk about health care costs.

How do you attempt to guard against this? EMBRACE RISK NOW. On an annual basis, large company stock returns have averaged about 11.2 percent since 1926, bonds have averaged about 5.3 percent and cash has averaged around 3.8 percent.

On the surface, each of these options looks at worst just barely OK.

But factor in inflation and the REAL (i.e., gain in purchasing power) stock return goes to 7.9 percent, the bond return to 2.2 percent and cash to just .7 percent.

With stocks you were able to have an increase in real purchasing power even after inflation. So embrace risk now in the stock market — it just may be the only real chance of maintaining your purchasing power during 20 to 25 years of retirement.

Glenn E. Atkins, CFA, is executive vice president and director of research at Garner Asset Management Co. LP, a registered investment advisor in Fayetteville that provides investment counseling and portfolio management to individuals, retirement plans and institutions. He has written extensively on financial topics and has appeared as a guest lecturer at Harvard Business School.