How to Hide From Market Risks

In the February 4, 2008 edition of the Houston Chronicle newspaper (and I suspect lots of other major newspapers throughout the country) appeared an article titled "What to do When You Want to Run from Risk". The article is all about the volatility in the stock market and where to park your money if you're concerned about losing your retirement nest egg in a market meltdown. As you can imagine, there were quotes from "experts" who advised that you should not panic because you'll be just fine in the "long run" (meaning ten or more years from now). I suspect these so called "financial advisers" were really "stock brokers" who are more concerned about their commissions than they are about whether or not you'll be around for the "long term".

As you know if you're retirement minded, "long term" is something you can't take for granted because ten years could be over 50% of your retirement years. You should also know that the "long term" Wall Street touts always comes with the assumption that you have the discipline to not take profits when prices rise and not to bail out when the market stinks. Research shows that the "average small investor" does not realize the market averages over the "long run" because they don't have this discipline. Wall Street also fails to tell you that their professional money manager rarely even match, let alone beat, the market averages like the DJIA and S&P (that's why index traded mutual funds are so popular right now). Yet, you'll still pay them fees for managing your mutual funds, variable annuities and diversified portfolios.

So, exactly where are you advised to put your money to hide from risk? The article talks about U.S. Treasury bonds that are currently paying about 3%. They do point out that these shoe-top-high rates are nothing to get excited about. What they forget to tell you is Treasury bonds, especially in small denominations that "average" investors would buy are not readily salable because this is an institutional market that deals in round lots ($1,000,000 or more). The spread in the bid and ask is likely to be rather large when you call your broker for a sell quote. What's more, if interest rate rise from the time you purchased them (and who thinks rates will stay at current levels very long?), you'll have to sell at a discount. That's right, even Treasury bonds can be unsafe if you have to sell before maturity because they have interest rate risk. Also, if rate go back up and you're holding fixed rate Treasury bonds you'll suffer an opportunity cost because you'll be getting a below market rate of interest. So, maybe Treasury bonds are not all that hot as a safe harbor for your retirement money unless you definitely plan to hold them until maturity.

What about U.S. Government Savings Bonds? Everyone agrees that Series I and EE bonds are hard to buy, limited in the amount you can purchase plus pay a very low rate of interest. Accordingly, not a good place for your retirement money.

Bank accounts that are FDIC are rock-solid safe, easy and familiar to about everyone who is retirement-minded. The only problem is that current interest rates are very low. This means your bank money will decline in purchasing power and the longer you keep it there the less it will buy because taxes and inflation exceed the interest rate you're paid. In other words, you might bleed slower with a bank CD but the end result will be the same.

These safe money places are called fixed annuities or index-linked fixed annuities and literally hundreds of billions of dollars are placed in them annually. Of course you never read about them in the personal financial advice column of the newspapers, bankers are silent about them and stock brokers will tell you they are bad, bad, bad. The simple truth is they are not good for everyone but if you're tired of risking your money to the whims of the market and are scared stiff that you just might outlive your money in retirement, you need to at least investigate the feasibility of annuities for some of your retirement money.

Yes, you can read horror stories about senior citizens who purchased two-tier index-linked annuities that have not treated them well. But most fixed annuities are not two-tier and no self-respecting financial advisor would ever offer them to his or her clients...but some do because they're more interested in their income than your welfare. How can you find out what to avoid and what might be good for you on the annuity front?

I've recently written a book called "Is Your Annuity Good or Bad" and I recommend it to any person considering an annuity and to any financial advisor offering them. If you'd like to read this new publication for free go to http://www.theretirementpros.com/RP_annuities_primer.php