Bonds in a Retirement Account are for Women Who Hate Money!

It's true! According to esteemed Wharton professor, Jeremy Siegel, "over the last century, accumulation in stocks have always outperformed other financial assets". Even with the crash of 1929! Even with all of the volatility and the somewhat media concocted sub-prime "crisis"! Even with any other mumbo-jumbo negativity you will see during this bull market now five years strong. And even when we do enter an economic slowdown, which by the way, is a perfectly normally occurring activity. (Does your weight stay the same every day-month-year? Does your mood? Your tolerance? Your eh-hum, drive? Anything?) Who said the market was supposed to have a linear relationship pointing toward the heavens, anyway?

Here's why: with a retirement account, it's all about your time horizon, or how long you'll need the money. And the very vast majority of us have a time horizon greater than 20 years. (I know my mother is reading this thinking, "But I'm retiring in three years!" Good for you, Mom, and thanks to your fabulous genes, people in our family have oft lived to see 100, so may I remind you that your horizon is well over 20 years!) Remember: it's when you expire, not when you retire, that a retirement time horizon makes.

Perhaps hard to swallow, especially since I haven't yet discussed a wine pairing, but beautifully true. Think of it this way: when my Mom retires in four years, she'll be in "the new 40's" (i.e., her actual mid-sixties). Based on her life expectancy, she'll be kickin' it for another 30 years -- wanting to withdraw her hard-earned money and still see growth within the account so she can fund trips to come babysit my kids. If she keeps her money in cash, it will not keep up with inflation. Sure, it won't look like it's going down -- she checks it 17 times a day, but it sure as hell won't increase! And when milk is $5 a gallon due to all of the subsidies for ethanol for green energy, she will actually have less money.

If she keeps her retirement in bonds, she'll have more than if she'd kept it in cash. But if she keeps it in a diverse portfolio of stocks, Siegel assures her she'll have the most: "As the holding period (your time horizon) increases, the probability that stocks will outperform fixed income assets (bonds) increases dramatically... for 20 year horizons it is over 90 percent of the time; and for 30 year horizons, it is virtually 100 percent of the time." Well, Mom, since you're likely going to live for 30 more years, you're now in love with stocks.

But cash is "safer" she cries! False! Losing money over time is not only unsafe, it's downright dangerous. (How do you expect to fund your wine habit if you have less and less money over time?) Again a retort from her: "Then bonds are a better bet -- stocks are so risky". Wrong again! Siegel puts it best: "It is very significant that stocks, in contrast to bonds or bills (Treasuries), have never offered investors a negative real holding period return". For a time horizon/holding period of over 10 years, "the worst stock performance actually has been better than that for bonds or bills".

The net of it is that for long time horizons (those over 20 years -- i.e., yours, mine, my Mom's and likely your Mom's), stocks are the way to go. Thankfully, the HMW knows that patience, hard work, and healthy amount of moderation and laughter are really important keys to success and living well. So it should be easier for us to understand is that the most effective way to "beat" the market is to in fact, join it! And join it for the long-haul. Starting yesterday.

******************* WINE PAIRING FOR ONLY THOSE SEEKING EXTRA CREDIT: BUBBLY!!!
Crack open a bottle of bub after your fingers "run" on over to Amazon or your preferred online retailer and buy Siegel's Stocks for the Long Run. I know stocks aren't exactly what you want to snuggle up to while on your upcoming holiday flight smashed in between the-cougher and the-guy-who-is-taking-up-both-his-and-one-half-of-your-seat, but the book will take your mind off your situation. And scare off any lame dudes seated in your vicinity who will be intimidated by a hot chick reading a finance book!



************* DISCLAIMER -- DON'T EVEN TRY TO SUE ME: I am not discussing how to make quick money or figure out the next Google before it's Google. I don't even have a trading account, nor do I bother searching for the next-best-thing. Doing all of that would not be considered LMF. A HMW doesn't have time for this, and now knows that a lot of people who do that let their emotions do the investing -- they buy high, sell low, and basically trip all over themselves to find the next "hot" issue. Those who day trade would be better off viewing their account like a gambling habit -- taking 5% or less and having fun with it, but never "betting the farm".