ST CHARLES: This time around, John Abel was ready for the stock market crash. “Back in 2000 before the dot-com bubble burst, I listened to my financial advisor and lost $80,000,” said the 65-year-old retiree in his home in the western Chicago suburb of Saint Charles. “That destroyed my remaining faith in the markets.”

In February, 2008, after falling stock markets wiped out virtually all their recent gains, Abel and his wife Carol decided to move their money into long-term corporate bonds. Just before the US House of Representatives’ September 29 rejection of a $700-bn financial sector bailout plan led to a 778-point fall of the Dow Jones industrial average, the Abels moved into a US government securities fund.

Retirees like the Abels around the United States face the same dilemma: How much can they afford to lose in a down market and how long can they wait to recoup their losses? For many the answer is: Get out while you can. “When you look at what happened to bond holders at venerable institutions like Lehman (Brothers Holdings), and have been left with nothing, it’s hardly surprising retirees are getting out,” said University of Maryland economist Peter Morici. “Older people have a lower tolerance for risk and the recent turmoil has scared the heck out of them.”

Financial advisors at companies like discount brokerage Charles Schwab and online brokerage TD Ameritrade Holding say that while fear is natural during turbulent times, retirees should not succumb to panic. “This is terrifying for them and we understand that,” said Stacy Hammond, a director at Schwab’s client experience group.

“This is a time to reconsider your long-term plan and ratchet down your risk… But it’s not a good time to make drastic moves based on emotion.”
Hammond recommends that retirees “rebalance” their asset allocation and keep 12 months worth of living expenses in easy-access assets. It is hard to estimate how many retirees have fled the markets. According to the Investment Company Institute, in the week ending September 25, retail US money market fund assets fell by $7.27 bn to $1.237 trillion, and institutional money market fund assets fell $8.38 bn to $2.161 trillion.

In the previous week, the ICI said retail assets rose $4.28 billion, but institutional assets fell $173.3 billion, the biggest one-week drop on record as credit fears infected even the once rock-solid investor perception of money funds.

Jim Bartoli, 83, and wife Alene, 85, retirees living in a western suburb of Chicago, said recent events had left them petrified. Two weeks ago, the Bartolis — both with clear memories of hardship during the Great Depression — sold their long-term bonds, closed all their bank accounts, and moved a portion of their savings into US government securities.

They also put $100,000 in cash — enough to last several years, they said — into a safe deposit box. “I saw what Wall Street greed did in the 1930s and I’m not going through it again,” Jim Bartoli said, shaking with anger.

The Bartolis said statements from public figures like US President George W Bush warning of dire risks to the health of the US economy had simply further fuelled their fears.

Like Schwab’s Hammond, TD Ameritrade’s chief investment strategist Stephanie Giroux said investors shouldn’t act on emotion. “We advocate as much as possible that investors stay the course and adopt a long-term view,” she said.

But many retirees argue that their experiences show a “long-term” recovery can take far too long. Abel noted the performance of the Dow Jones Industrial Average, which on Monday closed 15% below its January 14, 2000, peak of 11,722 points.

The Nasdaq has never come near its 2000 high. “Once you know the odds, why invest in the stock market?” Abel said. “If you’re a small investor you’re deluding yourself if you think you’ll make a long-term profit.”

source: Economictimes

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