While it doesn't seem to make sense, I believe that you are far more likely to back into a parked car in a virtually empty parking lot than in one that's crowded. That's because in an empty parking lot, you are not going to pay as close attention simply because you shouldn't need to. I proved my theory when my wife and I took a lunch break from our daughters' basketball tournament. I hit the only other car parked at the restaurant. When our insurance adjuster called for information on the accident, I could tell that she wasn't buying my hypothesis. Otherwise, she wouldn't have been asking things like, "Did anyone see the accident" or, "Was the other car moving?"
This episode got me thinking about financial advice that is being given in this economic climate and, if you stop to think about it, how wrong it can be. Let's look at some of it.
John Bogle, founder of Vanguard Funds, is a very wise man who often says very sensible things. But in a recent Wall Street Journal article, he wrote, "How much in bonds? A good place to start is a bond percentage that equals your age."
Given how volatile the stock market has been, this seems like reasonable advice. But it isn't. Everyone should own some bonds, but the percentage that anyone should own needs to be based on a number of factors -- most important being how much you plan to spend when you are living off of your portfolio.
Bogle implies that bonds are less risky than stocks because bonds should return your initial investment and an interest rate. But most bonds are very risky for preserving your purchasing power. Someone in 1998 who rightly predicted that the U.S. stock market was going to provide a negative return for the next 10 years and instead invested in 10-year Treasuries received more than 5 percent on his money. As those bonds mature now, their reinvestment rate is closer to 2 percent. They are suffering a 60 percent drop in income before taxes, not considering inflation. You need to create a portfolio that balances the various risks and gives you the best chance of meeting your spending requirements. In fact, with this low-interest-rate environment coupled with the high-dividend yield on stocks, owning a higher percentage of stocks is appropriate.
During times like these, people are feeling financially vulnerable. They are acutely sensitive to any bad news that they read, and there's no shortage of bad news.
"At high levels of stimulation, low-road emotions can so overrun high-road cognitive processes that people can no longer reason their way to a decision and [sometimes] report ... acting against their own self-interest," writes Michael Shermer in his book, "The Mind of the Market."
That is why investors are being told to pour money into investment vehicles such as annuities that they previously pooh-poohed. But generally, those types of investments should be avoided. Annuities that promise equity-like returns with guarantees don't exist. Fixed annuities lock you into long-term contracts, often with low interest rates. These products may seem like a panacea in turbulent markets, but when you focus on what your long-term objectives are, they almost never provide sound economics.
