IL Postcard

Retirement Investing

Date: 12/08/2007

Sunday, Dec. 9, 2007

Read more about retiring overseas in International Living Postcards--Sunday Edition

The price of oil goes from $30 to $100 a barrel, without causing inflation.

Argentina defaults on two-thirds of its foreign debt, some $70 billion, yet money pours into Argentina: stocks, bonds, and new debt. The Argentine stock market goes from 250 to 2,500 in five years.

China has strict price controls combined with regular wage increases. Yet Chinese companies make more and more money, and overseas investors pour in.

In the U.S. over the past five years, housing was driving the economy. Now the housing bubble has burst, and the credit markets feel the pain. Yet even without this prime mover, the U.S. economy keeps rolling along, with fine growth rates.

U.S. government deficits meander out of control. The vice president says deficits don't matter. Inflation increases. Yet interest rates fall.

The price of soy beans goes up so fast, and has been going up for so long, that people get bored talking about it. Yet soy bean products and derivatives stay at about the same price.

I'm confused. Everything I learned in Econ 101 has been turned on its head. Deficits don't matter. Paying your debts doesn't matter. House prices collapse and the economy keeps growing. Oil skyrockets and inflation remains tame. Soy beans go up but the price of soy bean oil stays the same.

I'm scared. Before, I could always see economic principles at play. Now, behavior no longer has the same consequences. I think the world has gone mad, like in one of those bizarre movies. How can you invest your retirement stash with all this going on?

One alternative is to reduce risk. When the going gets weird, pull in. We retirees generally want less risk than when we're working and earning. But less risk means accepting bonds, CDs, etc. at 5% or so. Discouraging. Research shows most of us tend to invest too conservatively. I want to avoid that trap.

Vicki and I decided mostly to stick with our present, high-risk portfolio of domestic and foreign stocks, even though we frankly admit we haven't the slightest understanding of what's going on. But we've taken a couple of precautions. Two years ago we increased our cash position to about five years of living expenses. That reduced our risk a bit, and should help us weather any downdraft. But in general we're keeping our retirement stash in long-term positions in the markets.

The point here: Stick to basic principles in retirement investing.

Diversify. Keep plenty of money in cash or equivalents, enough so you sleep at night. Refrain from pouring too much money into the hot markets of the day. Make sure your portfolio has an appropriate level of risk given your age, net worth, inheritance, and retired lifestyle.

If you're doing fine living on your investment income and have a relatively secure portfolio, why take a flyer?

Finally, stay for the long haul. You'll never make money trying to time the market, even less so when you don't understand what's happening. As long as the global economy keeps rolling you should be OK, no matter who wins or loses.

Paul Terhorst
“Retire Early” Editor, International Living

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