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The big mistake that retirees make with their money

MarketWatch logo MarketWatch 23/09/2018 Mark Hulbert

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(Money Talks News)

It’s human nature to believe that the economic and geopolitical uncertainties we face today are greater than ever before.

But it’s also human nature to forget that it has been forever thus.

And this forgetting wreaks no end of havoc on your retirement planning.

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The problem is that we fail to fully appreciate that the future is always uncertain—not just now, but at each point in the past and inevitably in the future as well. The mind trick we play kicks in as soon as the future gives way to the past: We immediately rewrite history to make it seem that what happened was obvious.

Today, for example, we make fun of investors who were investing in internet stocks at the top of the bubble in March 2000. How could anyone have been so foolish? At the time, however, there were few bears. And those few who were had been bearish for so long that they seemed like stopped clocks.

These mind tricks hold us back from making the right moves in our retirement portfolios.

a close up of a piece of paper© Provided by Dow Jones & Company, Inc.

To be sure, a failure to place current economic uncertainty in its proper historical context has an impact on all investors, not just soon-to-be retirees. But it has an outsize impact on this latter group because a bear market is particularly devastating if it occurs as retirement approaches or has just occurred.

So it’s entirely understandable that today’s soon-to-be retirees are concerned that a bear market could happen at any time. But they’re kidding themselves if they think that today’s concern is significantly greater than at many other times since the financial crisis.

Consider an Economic Policy Uncertainty (EPU) index that was created several years ago by three finance professors: Scott Baker of Northwestern, Nick Bloom of Stanford, and Steven Davis of the University of Chicago. As you can see from the accompanying chart, the EPU today is right in the middle of its historical range.

Or consider the sentiment among the nearly 100 stock market timers that I monitor daily. Believe it or not, my Hulbert Stock Newsletter Sentiment Index currently indicates that there is less bearishness than 99% of the days since the end of the 2007-2009 bear market.

Both of these data series provide a reality check for those who think uncertainty is greater today than in recent memory.

These mind tricks are of more than just passing interest, however. They have a negative real world impact.

Consider a Barron’s cover story earlier this summer, which made the astounding claim that now is “the worst time to retire since just before the dot-com bubble burst.” The reasons? The decadelong stock bull market and the 35-year old bond bull market, both of which will translate into “rising market volatility, rising inflation, rising interest rates and an uncertain economic outlook.”

Certainly seems a plausible argument. But only a desultory walk down memory lane is needed to remember that concerns about volatility, inflation, interest rates and the economy have been with us for years—for as far back as any of can remember, in fact. Based on the arguments of the nearly 100 market timers in the stock, bond and gold markets who I monitor daily, I can tell you that at almost any point over the last decade there were many advisers making the same argument that Barron’s is today.

So what’s different about today?

The author of the Barron’s article does acknowledge that October 2007 also would have been a terrible time to retire, since that’s when the stock market topped out before the devastating Great Recession—in which the S&P 500 (SPX) dropped by more than 50%. But the author claims that now is an even worse time because, in 2007 “the near-term outlook for market returns was far better than it is today.”

But that argument strikes me as just another case of rewriting history to make the future in 2007 seem more certain than it really was. Today we know that the financial crisis-induced bear market was relatively quickly erased by the powerful ensuing bull market. But there was nothing preordained that it would work out that way.

The bottom line? Your retirement investment plan should not be dependent on forecasting when bear markets will occur, since few (if any) have shown this forecasting ability. The correct retirement plan should be one that you can initiate at any time, even if it happens to have been when a bear market began.

And if you do have that correct plan, now is just as good a time to retire as any other.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.

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