Friday Desk Clearing Time - 9/19/2008

To say that this has been an eventful week in the investment world would be an "understatement of immense proportions". So, just to close out a few things we discussed earlier in the week, consider the following major interventions by the government that have immensely boosted confidence in the financial markets:

• AIG Bailout - check


• Money Market Funds Bailout - check (indirect effect of Lehman's bankruptcy and the Fannie/Freddie bailout earlier)

I am happy to report that today's market rally has at least pared somewhat the market (paper) losses in my 401(k) account. With this as the backdrop, I turned to a page one article in Friday's Wall Street Journal, as reported by Jennifer Levitz, Ilan Bhat, and Nicholas Casey: "Wall Street's Ills Seep Into Everyday Lives." This article reports on how "common people" are coping with the turbulence in the financial markets:

Bradford Roth, the 56-year-old chairman of a Chicago law firm, had a clear strategy for dealing with Wall Street's gyrations when he stopped by a local Fidelity Investments branch Wednesday.

He'd make a deposit to his cash-management account, but he wasn't going to check the balance of his retirement account.

"The less you know," he said, "the better you feel. There's nothing wrong with working in your 80s."

Mr. Roth is clearly unsettled a bit.

"I've been talking to my banker and telling him to get all my money out of the market," said Pat Hurley, a 57-year-old electrical contractor from Phoenix. "I'm really worried -- I think the stock market is going to get worse and worse," he said.

Mr. Hurley has $440,000 in his retirement fund, a sizable chunk but not nearly the million dollars he was hoping for. "I finally got back to where I was in 2001 and n0w the stock market's diving again," he said.

This is the reality facing many boomers - a 57 year old with $440,000 in his retirement fund, not the million dollars he was hoping for...

Bob Conrad, a 59-year-old budget director at the U.S. District Court in Dallas, sees his chance for retirement next year slipping further away. After his nest egg lost 10% of its value, he moved his money a few months ago out of stocks. He thought he was set, but soaring food prices and seesawing energy prices already had him worried. And now, "this thing looks like it's going to get worse before it gets better," he said. "That's just my luck. Looks like I'll be working a while longer."

I am not a licensed financial advisor, but I can't help commenting on one thing here-What investment strategy is this 59-year old following, barely 1 year from his hoped-for retirement, that is causing him to lose 10% of his retirement account's value in a year?

I am going to steam ahead to near the bottom of the article where another boomer couple nearing retirement is quoted:

With their retirement savings building in a pension fund since 1983, Seattle residents Pat Williams and her husband, Jim, are now questioning their savings strategy. The retirement accounts, which are run by Smith Barney, a unit of Citigroup Inc., were worth a little more than $1 million until four months ago. Since then, Ms. Williams said the combined accounts have lost $170,000.

Now the stock-market plunge caused by the fall of Lehman Brothers and the sale of Merrill Lynch & Co. had their accounts losing an additional $40,000 a day for the past two days. So tomorrow, Ms. Williams said she and her husband are pulling out roughly 75% to 80% of the money invested in their retirement accounts and putting it in a money-market account while they figure out what to do next.

"We just don't have the staying power," said Ms. Williams, 58. "I can't watch anymore of our money go away."

Mrs. and Mr. Williams are rightly concerned about their investments. Once again, I can't help but comment on what kind of investment advice the Williamses are getting! At age 58 (Mrs. Williams age quoted above), they've lost 17% ($170,000 of $1 million)of their account in 4 months. Not stopping there, they've lost another 4% ($40,000 of $1 million) in the last couple of days. This implies a rough beta of 1.0 with the market taken as a whole.

Since this was the only example with good approximate numbers and ages given, I took the liberty of trying to figure out how they would have performed in an age-appropriate fully diversified portfolio such as a target-date mutual fund over the rough ranges of dates mentioned in the article. I am going to take Mrs. Williams age of 58 as a starting point and assume they will retire at age 65 in 7 years, i.e. the year 2015.

For no particular reason, I will pick the Fidelity Freedom 2015 Fund as their theoretical investment fund and see what happens next. Assume 4 months ago, from the date of the article (May 19, 2008), they had $1,000,000 worth of shares in this fund.

The NAV on 5/19/08 was $12.11/share, so lets say they had 82,576.383 shares for there $1 million. The closing NAV on Thursday, 9/18/2008, the day just before the publication date of the article was $10.74/share. Their account would have been worth 82,576.383 X 10.74 = $886,870.35. This represents a nominal non-annualized loss of 11.31%.

By way of comparison, if they had been invested 100% into the S&P 500 index (a popular benchmark) over the same time period, the real nominal return would have been -15.10%. So their $1 million portfolio would have lost $151,000 which is still less than the $170,000 quoted in the article. This implies a beta of more than 1.0 of their portfolio! (I invite any readers with more insight into investment strategies to help me make sense of this via comments.)

Again, stories of four baby boomers in their mid- to late-fifties terribly close to retirement age, is not a "statistically significant" sample to base any theories on, but they hold important lessons for anyone contemplating retirement over the next 5-10 years.

Last month I wrote similarly about a report in the Dallas Morning News in which I said: "However, these are cautionary tales at best - with coded messages for both retirement savers as well as policy makers. Social Security by itself is not enough, guaranteeing in some locales around the country barely a poverty-level monthly benefit payment, and a purely market-based defined contribution savings system that is too volatile to give savers peace of mind in their sunset years."