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Last Updated: Oct 28th, 2008 - 17:57:18 |
ST. CHARLES, Ill (Reuters) - 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 adviser 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 U.S. House of Representatives' September 29 rejection of a $700 billion financial sector bailout plan led to a 778-point fall of the Dow Jones industrial average, the Abels moved into a U.S. government securities fund.
"I'm going to watch that fund very closely and if there's any trouble we'll move into certificates of deposit," said Abel, who worked in public relations for nonprofit groups and passes the time building furniture. "I'm 65 and don't have time to wait for things to get better."
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 Inc), 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."
SUCCUMB TO PANIC
Financial advisers at companies like discount brokerage Charles Schwab Corp and online brokerage TD Ameritrade Holding Corp 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," he said.
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 U.S. money market fund assets fell by $7.27 billion to $1.237 trillion, and institutional money market fund assets fell $8.38 billion 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.
"We're getting a lot of calls, but the retirees we talk to are well informed and only in outlying cases do we see anyone making really drastic decisions," said Rich Kerr, a branch manager at Charles Schwab in Chandler, Arizona.
But he said "self-directed" clients -- those with Charles Schwab accounts who make all their own portfolio decisions -- "do tend to be a little bit more on the emotional side."
PETRIFIED
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 U.S. 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 U.S. President George W. Bush warning of dire risks to the health of the U.S. economy had simply further fueled their fears.
Like Schwab's Hammond, TD Ameritrade's Chief Investment Strategist Stephanie Giroux said that 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 percent below its Jan 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."
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