Investors Playing It Too Risky With Retirement Funds?
Individual investors are becoming far more aggressive in the way they invest their retirement savings--a shift that is heartening some financial advisers and horrifying others.
Since Individual Retirement Accounts, Keogh retirement accounts (for the self-employed) and company sponsored 401(k) plans began to flourish in the early 1980s, individuals have increasingly moved those dollars out of “safe” bank and S&L; savings certificates and into riskier investments such as stocks and bonds.
Now that shift has swelled to tidal-wave status, as extremely low interest rates on CDs compel investors to hunt for higher returns in stocks and bonds.
Fidelity Investments, the Boston-based mutual fund giant, says it opened 26,814 new IRAs in February, its biggest month since 1987. The majority of those accounts were transfers of IRA funds previously kept in banks, S&Ls; and other competitors, Fidelity says.
And a stunning 82% of the new Fidelity accounts went into stock funds, a record for the firm.
Another mutual fund group, T. Rowe Price Associates in Baltimore, says its January IRA business totaled 12,300 new accounts, double the year-earlier figures. The Los Angeles-based American Funds group also says its IRA business is running double last year’s level.
Between 1983 and 1990, investors’ total nest egg in IRA and Keogh accounts swelled from $113 billion to $564 billion, according to the Employee Benefit Research Institute in Washington. In that same period, the percentage of those dollars held by banks and S&Ls; dropped from 59.3% to 41.8%. Meanwhile, the share held by mutual funds and brokerages zoomed from 25.6% to 43.8%.
Though some of that gain came from stocks’ appreciation in the ‘80s, bankers admit they’re losing the IRA war to Wall Street. And many financial advisers insist investors are doing the smart thing in shifting IRAs from CDs to stocks.
The classic argument is that, over any long time period, stocks are virtually certain to produce higher returns than any other investment. “People who want to have a comfortable retirement 20 or more years down the road need to have a portion of their assets in the stock market,” says Roger Servison, president of Fidelity Retail Services.
To some advisers, it’s an extremely encouraging sign simply that individuals are taking the time to review their retirement investments. With both IRA and 401(k) plans, many people never bother to question choices made years ago, even though those investments may no longer suit their needs.
Janice K. Hobbs, a financial planner at Innovative Financial Planning Services in Tustin, says it’s common to see clients “who don’t even remember what they chose” for their IRAs or 401(k) accounts. Inertia obviously remains a strong force when it comes to peoples’ money.
But while there’s great merit in giving your retirement-savings strategy a periodic tune-up, some experts worry about investors making the wrong choice twice in a row: The same people who played it too safe in the ‘80s, keeping all of their retirement savings in CDs, may now be risking too much by switching the bulk of their retirement funds into stocks--at record-high prices.
“This isn’t necessarily a question of ‘conservative’ versus ‘aggressive’--it’s a question of investment ‘fit,’ and what’s right for you,” says Steve Benson, vice president in the retirement-investments group at money manager Prudential Asset Management Co. in Scranton, Pa.
Though Benson doesn’t deny the stock market’s superior long-term performance, he still takes issue with investment advisers who say that individuals in their 30s and 40s, in particular, should feel comfortable keeping 80% or more of their retirement nest egg in stocks.
“A lot of young people don’t have enough assets to go into stocks” that heavily, Benson contends. What if you lose your job and are forced to tap your IRA or 401(k) savings (often individuals’ only real savings) far earlier than expected? he asks. If stocks are in a bear market at that point, you could quickly face financial ruin.
His argument: You first build a solid base of “safe” investments in your retirement accounts, including bank CDs and other conservative vehicles, such as GICs, or guaranteed investment contracts, which pay fixed yields. Then you begin investing in higher-risk vehicles such as stocks.
Admittedly, Benson has a vested interest in pushing conservatism: His company, Prudential, is a big seller of GICs, as are other major life insurers. But his point ought to be well taken: If you erred by being too conservative with your retirement money in the 1980s, don’t err on the other side by shifting all of those funds into stocks today. A balance of investments is the way to go.
IRA / Keogh Assets In a search for higher returns, individuals have significantly shifted their IRA and Keogh account assets toward mutual funds and self-directed brokerage accounts and away from banks and S&Ls.; 1983 ($113 billion) Banks / S&Ls;: 59.3% Mutual funds: 14.9% Brokerage accts.: 10.7% Life insurers: 10.7% Credit unions: 4.3% 1990: ($564 billion) Banks / S&Ls;: 41.8% Mutual funds: 25.3% Brokerage accts.: 18.5% Life insurers: 9.2% Credit unions: 5.1% NOTE: Totals don’t add up to 100% because of rounding Source: Employee Benefit Research Institute
