Barbarity swept the European continent between the 5th and 12th centuries by marauding Vikings as they raped, pillaged and plundered. Violation of a nun’s chastity – brides of Christ – could forbid them entry into Heaven. So imagine yourself a nun and barbarians at the gates… what would you do?
St. Ebba was Mother Superior of the monastery of Coldingham on the Scottish border overlooking the North Sea. The Danish invaded in the 9th century, and fearing the Viking’s reputation, St. Ebba gathered her nuns and encouraged them to follow her example. She cut off her nose and upper lip with a razor to disfigure herself to be unappealing to raiders. Her assembly did the same. Imagine the pain of their self-mutilation – and likely not the keen edge of modern kitchen cutlery. The Vikings arrived at dawn and were so disgusted, they set fire to the monastery and the holy virgins perished in the flames. They traded their chastity for their lives.
Life’s rich with trade-offs. And times are scary. There’s plenty of pounding at the gates today. One is market volatility. Here are some ideas to discuss with your advisors to help you avoid “cutting off the nose to spite the face.”
Why Does Pessimism Sound So Smart? – Some people are so stressed that it might be good medicine to turn off the news – most of it bad – blaring from TV, tablets and smartphones. Morgan Housel’s article in Motley Fool discusses the perverse popularity of pessimism. “For reasons I have never understood, people like to hear that the world is going to hell,” says historian Deirdre N. McCloskey. Housel wrote that bull (optimism) sounds like a reckless cheerleader, and bear (pessimism) sounds like a sharp mind. And clearly there’s more at stake with pessimism. Daniel Kahneman won a Nobel Prize showing that people respond stronger to loss than gain – “It’s an evolutionary shield… Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.” And reasons why pessimism garners so much attention – pessimism requires action whereas optimism means staying the course, optimism sounds like a sales pitch while pessimism sounds like someone trying to help you, and pessimists extrapolate problems yet fail to account for our remarkable abilities to adapt and overcome setbacks.
So what should you be doing? Investors are not a homogenous group of people that should all turn one way as a herd. Rather, investors can be segregated into different groups each having unique needs. I’ll use “age” as an example:
70’s and 80’s – “We’ve lived a lifetime of ups and downs, and diversification and time tends to smooth things. However, we’re not going to get out of this alive, and need to spend time with family and team about passing on our “stuff” and aging/end-of-life care before a health crisis erupts.”
50’s and 60’s – “Time to get serious about retirement. I know that holding a ton of cash isn’t going to protect me long-term. Are our spending assumptions realistic, and will we have enough cash flow to last us 3 to 4 decades of retirement?
30’s and 40’s – “I feel I should be “conservative” after seeing the Dot-com and Financial Crisis. But there are only 3 sources of retirement income: pensions and Social Security, continued employment, and income from my savings and investments. I’m not likely to hang around long enough for a pension, don’t trust SS, and want more freedom and time with my friends. So I’ve got to invest for me, and what a great time to buy when stuff’s on sale!”
Are you in these situations? Assuming you’ve got a reasonable time horizon and prudently diversified, there’s little reason to “uninvest.” And if you’re older and concerned with the volatility, why are you invested in “risky” assets anyway? (Note: “It’s for my family” is an excellent answer). Here are two strategies to discuss with your advisors:
- Heavy in cash or similar (“Fixed” option in retirement plan) – Consider putting cash to work because investments are cheap – caveat: they may get cheaper. S&P 500 is down 13% from its 52-week high, developed and emerging markets 24% and 34%, US small caps 26%, Nasdaq 15%, REITs 18%, and broad commodities 44%. This may be better for those with “sudden cash” – you sold a property or switched retirement companies – and less suitable for “nervous Nelly’s” (there’s a reason you a bunch of cash).
- Roth conversion – Monies in your IRA are generally fully taxable when you withdraw them in retirement. Roth IRA withdrawals however, are generally not. You can “convert” the traditional IRA to a Roth IRA, however, you have to pay taxes now for the switch – converting a $100,000 IRA at 28% tax bracket costs you $28,000 in Federal taxes (plus state). Consider conversion if (1) you’ll be a higher tax bracket when you retire, and (2) IRA value is lower due to market declines. Conversions are rare in my experience, primarily because most people hate to pay taxes. However, talk it over with your CPA and financial advisor.