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Subject:  Re: Retirement plans Date:  10/13/1999  1:36 PM
Author:  TMFPixy Number:  14496 of 90150

Chuck, in a reasoned post, said in part:

<<I strongly but respectively disagree with the previous advice. I do agree that you must choose a strategy that you are comfortable with.

Investing in fixed income securities is very risky. During the 73-74 bear market they would have gotten killed because of rising inflation and interest rates. In fact Holding such long term instruments during the 60's & 70's was a real looser.

Investing in long term fixed income instruments assumes the risk of rising interest rates when they lose absolute value as well as rising inflation when they lose relative value and purchasing power.

The longest period of a bear market, from peak to total recovery was less than 2.5 years and that happened over 3/4 of century ago. There was a large bear market in 1973-74. It lasted less than 2 years and occurred over 1/4 of a century ago. The most recent lasted about 7 1/2 weeks.>>

Recognizing the definition of a bear market is in the eyes of the beholder and whose statistics you are using, I still am at a loss as to your rationale for the length of the 1973-74 drop. According to Ibbotson, a widely respected and often quoted authority for such data, in December 1972 the S&P 500 total return index (capital appreciation plus reinvested dividends) stood at 84.96. In January 1973 the downward plunge began not to bottom out until September 1974 when it hit 48.74, a cumulative loss of some 42.6% from its high. The high wasn't regained until June 1976, and it stayed there only until February 1977 when it again plunged below the 12/72 level. It remained below that level until April 1978 when a sustained market recovery set in. Given that, I have a hard time buying into your premise that the longest bear market from peak to recovery is less than 2.5 years.

Bear in mind also that Fools don't talk about putting three to five years' income into long-term fixed income vehicles for the precise reasons you outlined. We stress far less volatile vehicles like MMFs, CDs, and short-term to intermediate-term bonds instead. In the 73-74 market, those vehicles declined slightly and recovered within a matter of weeks, unlike stocks and long-term bonds. Against inflation in the 70s, they lost. BUT (and it's an important but to many) -- they didn't lose significant principal even in their down weeks. A long-term investor who is drawing from and not adding to his/her portfolio will appreciate that lack of volatility when having to make redemptions in the face of a falling market. Obviously, when you start withdrawals matters as much as the amount taken. Start in a period when the market is in a multiyear slump, and you could run out of money. Start at the onset of a sustained bull market like that of the past 15 years and your children may very well inherit a substantial sum of cash. Sadly, though, few of us have crystal balls clear enough to see the future in stark detail. Hence, the hedging of bets by regulating the rate of withdrawals and how much is left in vehicles other than stocks.

How much a retiree should allocate to stocks and how much to short-to-intermediate-term vehicles is a matter of how much risk and discomfort a person is willing to tolerate. Obviously, you can tolerate more than most. For one who still invests, the risks one is willing to assume should be great because stocks have always recovered in time to go on to newer highs. To one living on the portfolio, the decision to continue that risk should be made with care. Guess wrong, and you could end up with more time than you have money. That's not a comfortable position for many to have to face.

I also am a proponent of Murphy's Law. If something can go wrong, it will. I don't subscribe heedlessly to the thought that "things are different now" nor do I think that because a prolonged down market hasn't occurred in the last 25 years it won't happen again. Just ask the folks in North Carolina and along the Mississippi and Missouri Rivers about five hundred year floods should you think otherwise. Some Fools like more risk than others. When it comes to a retirement stash that represents all the cash I have to draw on, count me in the latter category.

"Ya makes your choices and ya lives with the results."


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