Retirement and Market Gyrations

The turmoil on the stock exchanges all over the world has caused a lot of anxiety, particularly among retired or nearly retired people. Unless one has a guaranteed pension of a senior civil servant or corporate executive, the savings play an important role in how comfortable the retirement is going to be. A drop of 50% in the lifetime saving, as looked likely last week made a lot of people feel quite poor, though not to the extent of giving up dining out or cancelling the cell. A recovery since then has put a smile on some faces but there is a worry behind the smile - what is coming next week; week after that?

There are several issues to be addressed here which may impact on how one feels about the stock market gyrations. First and foremost, it is the governments of the United States, Greece, Spain, Italy and others whose credit rating is being downgraded, not the public companies. The companies will be impacted by the downgrades of government debts only if the tax rates were hiked excessively. But given the globalisation of industry this is out of the question. By and large, as is clear from most recent financial reports, the companies are making money, they have hordes of cash and many are increasing dividends. The drop in their stock prices is a sad commentary on investors' nerves, not on their management or their prospects. After all, even in the most desperate Western countries, ninety percent of the population is employed, most of the rest has support of social welfare agencies and no one is starving unless she is trying to lose weight. Restaurants are busy, cash registers in stores are tinkling, not many maids or butlers have been laid off. In this situation, the investors will return to market sooner rather than later and price recovery is weeks away, not months or years.

Second issue of vital importance is the state of heavily margined accounts. At least some of the fall last week was due to desperate sells to meet the margin requirements - i.e. pay back the broker money borrowed when price was higher. Pensioners do not believe in margin accounts and their balances may be diminished but are not wiped off. Except for the 'nervous Nellies' who sell at the bottom, most invesstors live to collect their dividends and reap the gains as the markets improve. They don't really have any reason to lie awake at night waiting for the other shoe to drop in the form of opening bell of the exchanges.

One should consider the savings as the capital which will provide income for a certain period. If you have a hundred thousand dollars and expect to live another twenty years, you can draw ten thousand a year (assuming modest gains over the duration)for the period. During these twenty years there will be several boom and bust cycles; no one knows when, how long or how severe; only that these cycles are as certain as death, hopefully not before twenty years are up. The bust occurring right now has no different impact on the account than that two, four or eight years later. Similarly, if it were a boom time, the daily growth should not influence your decisioon to retire or how much to withdraw. These are determined by the actual value of the savings and your life expectancy. Only thing you can be reasonably confident of, from the history of last two hundred years, is that a well-constructed portfolio will double every seven to ten years with ups and downs over short time frames.

There is a temptation to sell off when the indices are trending downwards with an expectation to buy back at the bottom. By all means do this if you can divine the trends and the bottoms. I have no crystal ball and my only judgement on buy and sell is based on a company's stock price vis a vis its revenues, income, dividends and prospects. If I suspect that the price has run far ahead of those factors, it may be time to sell. Similarly, if the price has dropped below that indicated by revenues etc. it may be time to buy even if there is selling pressure (that is why the price is down).

One final comment: Don't get caught up in individual stocks - evaluate the whole portfolio. Individual stocks will fluctuate much more than their total value which should be your focus. Remember: The biggest losers of today are the biggest winners of tomorrow.