Investors have a lot to be fearful of these days. They have legitimate concerns about the deficit, the state of the economy, and high unemployment rates.
It’s not just economic abstractions. The fears have become personal. Here are the top three fears of my clients and some suggestions for dealing with them.
1. I am going to run out of money. This is the big one. Almost all investors took a huge hit in their personal and retirement portfolios in 2008. Many have been the victims of a sluggish economy and downsizing. It’s the perfect storm for financial disaster, especially if you are at or near retirement. Consider these options:
- Delay retirement. You can increase your Social Security benefits by 7 to 8 percent for every year you delay retirement. You will also be increasing your 401(k) plan contributions. Finally, you will delay the time when you need to tap into your retirement nest egg, which gives it more time to grow.
- Buy a fixed-income annuity. With a fixed-income annuity, you give the insurer a lump sum return and you receive periodic payments for the rest of your life. For conservative investors, fixed-income annuities (not to be confused with variable deferred annuities) can significantly reduce the possibility of running out of money. TIAA-CREF and Vanguard are the leaders in low-cost fixed annuities.
2. The dollar is falling. Many investors worry that record deficits will continue to erode the value of the dollar. They believe a falling dollar will affect the quality of their life in retirement.
This concern is largely overblown. Most Americans will retire in this country and will be making purchases in dollars, which will lessen the impact of a falling dollar.
A falling dollar is a mixed blessing. Imports will be more expensive, but exports will be cheaper, making our products more attractive to foreign purchasers with stronger currencies.
Finally, it’s easy to protect yourself against this risk. Just be sure you have a globally diversified portfolio of low-cost stock and bond index funds.
3. Inflation is rising. We have been in an extended period of low inflation, but many investors believe high inflation is inevitable.
No one knows whether (or when) inflation will raise its ugly head. You can protect yourself against inflation risk by purchasing short-term index bond funds for the bond portion of your portfolio. Inflation is reflected by an increase in short-term bond rates. As the bonds in a short-term bond portfolio mature, they are replaced with bonds at the higher interest rates. Using short-term bond funds is far better than using Treasury Inflation-Protected Securities (TIPS). You avoid having to pay the premium with TIPS but get as good of (or better) inflation protection.
Fear is the daily grist for many traditional brokers and advisers. Uncertainty makes it easier to encourage trading. Trading increases revenues for brokers, but transaction costs reduce your returns.
Fear is also a boon to the financial media, because it increases readership and viewers, and that means more advertising revenue.
You need to ignore all the hype and noise and focus on fundamental, sound, academically based guidelines for coping with your fears.
Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.
Watch Dan on YouTube. Follow Dan Solin on Twitter.
Dan Solin is a Senior Vice-President of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read, The Smartest 401(k) Book You’ll Ever Read, and The Smartest Retirement Book You’ll Ever Read. . His latest book is Timeless Investment Advice.
Watch Dan on YouTube. Follow Dan Solin on Twitter.