A Broker's Advice to His Clients
The following doesn't reflect the entirety of our thinking, but it captures the essence of it. We're sending this to 401(k) participants in plans for which Interlake serves as investment advisor.
Dear Plan Participants --
As you know, these are very difficult times in global financial markets. A full explanation of the last several months would require more detail than I can fit into this short note, but I'd like to summarize a few key points and, by putting all of this into its larger context, encourage you to remain committed to your retirement program.
First, the basic problem is the contraction of credit markets in an economic system that’s deeply dependent on credit expansion. When banks can't or won't lend to each other, or to businesses and individuals, the system seizes up. That isn't a problem just for Wall Street; it's a problem for the entire global economy.
The good news is that policymakers are responding aggressively with a wide range of tools, some of which will help. This is not a replay of 1929. The bad news is that this process will take time to run its course. Until confidence and capital can be restored to the system, markets will remain volatile and asset prices will remain under pressure.
I can't tell you when the stock market will stop moving lower. I can't tell you when it will start moving higher. But I can tell you--and this is an enormously important point--that lots of very good long-term assets have been put on sale by people who, for various reasons--some technical, others psychological--have been forced to sell. You aren't forced to sell. In fact, you're able to continue accumulating assets at very desirable prices, and that's a supremely powerful position in times like these.
This is a classic bear market, and it won't be the last one you'll see in your lifetime. Whatever uncertainty you may feel at the moment, it's my fiduciary duty to encourage you to continue deferring into your plan. Expected future returns on your current contributions are now substantially higher than they were just a few weeks ago. That may seem counterintuitive, but that's exactly why it's true. As others bail out and run for cover, you'll continue buying good assets at increasingly attractive prices.
I know these are stressful days. I feel it right along with you. But you have the luxury of taking the long view, and that view is now more attractive than it has been in years.
Regardless of short-term market conditions, your 401(k) plan retains its essential advantages: low expenses, true diversification, and solid portfolio discipline.
As always, you should feel free to get in touch if you have any questions at all.
Sincerely Yours,
Kevin
Not all of the above applies to all retirement plans, especially the points about low expenses, diversification, and discipline. But the letter's basic argument does indeed apply to participants in the accumulation phase of life.
As always, those at or near the end of the accumulation phase should not be over-exposed to risky assets in the first place. But that has more to do with an individual's existing corpus of assets, not their continuing contributions, which, if they have any risk acceptance at all, should be directed increasingly heavily toward equities, whose future expected returns are substantially higher now than they were just a few weeks ago. (On this topic, see John Hussman's latest.)
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This article has 2 comments:
- richjoy
- 126 Comments
Oct 07 06:41 PMHowever, unless something radical happens soon, we are going into a tough recession (some, but not I, think worse).
My point is that this recession will adversely affect millions of baby boomers who are/were planning to retire in the next 5 years. They are going to have to keep working (if they don't lose their jobs).
Furthermore, those in their 50s will need more years to make up lost ground, and even more to overcome the inflation we are going to be experiencing as the Fed uses years of inflation to get us (and banks) out of this huge mess!
- knolly
- 4 Comments
Oct 17 11:20 PMMore by Kevin S. Price