Millions of retirees are about to get screwed by taking the advice they are getting from their financial “professionals”. Older investors and retirees are being told to stay invested in the market regardless of the current risks. It is foolish advice that a lot of foolish retirees will follow.
A lot of people have done quite well in the stock market “buying and holding” during this long bull market. But the time to hold is likely behind us and the time to fold’em is right now.
Many of these retirees have the same poorly diversified portfolios of stocks they have held for a long time. It is improbable that the price many of those stocks will continue to appreciate. If anything, the risk that they will continue to go down is greater than the likelihood that they will continue to go up. If they are not going to go up in price, there is no reason to continue to hold them.
Concerned Mother
Last week, I got a call from a friend whose mother was concerned that her account had taken a 6 figure loss in value for the first quarter of this year. His mother is divorced and already retired. Her account is with a large, national brokerage firm. She is concerned that her account balance dropped so much and so fast.
Her broker is telling her not to panic which is always good advice. Investment decisions should be based upon mathematics. It is not very hard today to do the math and realize that holding on to the portfolio you had last year does not add up.
Her portfolio today is worth less than it was 3 years ago and as I said, down over $100,000 in this last quarter alone. Her broker told her to “stay the course” because “these corrections happen and the market always comes back”.
As I have said before this current correction is my 7th or 8th and no two were exactly alike. In the last two, 2001 and 2009 there were clear indications that the market averages were too high and likely unsustainable many months before the bottom. There was plenty of time to sell out and save some money but many brokers then, as now, told their customers to just hang on.
The mainstream stock brokerage industry chose to ignore the same indicators that they used when they predicted that stock prices would go up. It is ignoring the indicators that this current market is still far from its bottom.
I wrote an article just two months ago when the pandemic was still tangential to everyday life. I did not think that the government’s tepid response in January would be so consequential by April.
I noted the various conflicts of interest behind the brokerage industry’s desire for investors to stay invested. Recessions hit Wall Street hard. Profits and bonuses disappear. A lot of people typically get laid-off. The idea that people might sell their stocks and put the funds in a CD to sit things out gives Wall Street indigestion.
Just Do The Math
Investing is governed by mathematics. Large institutions control most of the money that is invested in the stock market. Most use the same method of Fundamental Securities Analysis first described,in 1934, by Ben Graham in his book of the same name. That book is still used in virtually every major business school. A large investor like CalPERS or an insurance company will have hundreds of analysts on staff.
At its basic level, the analysts are using one primary metric; earnings both current and projected into the future. A projection of higher earnings for next year would be an indication that the share price will be higher next year as well. Analysts are always looking at a company’s business to see if its revenues and profits are likely to increase 6 months or a year down the road.
What do these analysts see today?
Right now, it is pretty clear that a great many companies will continue to struggle at least until the end of this year. When these companies report their earnings for 2020 next spring, they will show that earnings, if any, will be down from earnings last year. Lower earnings should indicate lower stock prices.
Every indication is that the stock market is likely to be lower next year. The risk that people who stay in the market for the next year will lose money is high. So why would any financial professional recommend that their clients should stay invested especially clients who are already retired? How much can retirees afford to lose in a bear market?
Regulators Agree
A lot of people who got the same advice to stay invested no matter what eventually watched their account values decline to the point that they finally realized that their broker was full of shit. They sold their portfolios and realized the losses that they had were a result of risks that they never wanted to take.
I handled many customer claims against their stockbrokers recovering losses from the last two corrections. The stockbrokers always make weak defenses when confronted with losses that their customers never expected and which they could ill afford.
These claims are handled as arbitrations run by FINRA, the brokerage industry regulator. They are fast and cheap. Like most court cases, FINRA arbitration claims usually settle before the hearing. Retirees who lose money in the market can often recover some or most of what they lost.
When every stock brokerage account is opened, there is a question on the new account form that asks for the customer’s “risk tolerance”. A typical form might ask investors to identify the account as “conservative”, “moderate”, “aggressive” and “speculative”. They represent an ascending willingness to lose money. But a willingness to lose is not the same as a desire to lose.
For retirement accounts, especially as the retiree gets older, there is a consensus that the account should become more conservative. Once people stop working and are using their retirement funds to pay bills, preserving those accounts becomes the paramount concern.
Diversify
A diverse portfolio of stocks and bonds was always considered to be a “moderate” risk account. And then something unusual happened. The overall market itself has become riskier and many of those diversified accounts took on the risks of an “aggressive” account.
There is no justification for a stockbroker to tell a customer looking for a moderate risk account to stay invested when the risks of the portfolio they are holding have gone up past the customer’s level of comfort. Many retirees have already lost more than they can afford to lose.
A stockbroker is required to have a reasonable basis for every buy, sell, or hold recommendation that they make. When arbitrations over losses in 2001 and 2009, went to a hearing, there was nothing that the brokers could point to in their files that showed they had a reasonable basis to tell people to stay invested.
If your brokerage statement shows losses that you did not want, send your broker an e-mail asking for his/her specific advice as to what you should do now. Ask them for the research reports that support their recommendations.
If they tell you, “the market has always come back” remind them that past performance is no indication of future results. If they tell you that no one saw the pandemic coming, remind them that price to earnings ratios were way above their normal ranges for months before the virus.
If your losses are too high and you get insipid answers from your broker, just send me an e-mail. I will be happy to refer you to an attorney who will help you recover your losses.
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