CAMBRIDGE, Mass., March 12, 2009 — As they survey the wreckage of their retirement accounts, shell-shocked investors are wondering what to do now. While many advisors suggest holding tight until the stock market recovers, MIT Sloan School of Management visiting professor Zvi Bodie says investors need to face some painful facts.
“Stocks are risky,” says Bodie, who has been studying retirement strategies since he was a graduate student at MIT in the early 1970s. “To rely on them for what you really need is a bad idea.”
His advice: Unless you have the heart of a high stakes gambler, get out of stocks now and put your retirement money in inflation protected government bonds and similar instruments. These investments are immune to the kind of calamity Wall Street experienced last year, and they are guaranteed to keep pace with inflation, a potential problem in the future, according to Bodie.
The returns might be modest, but investors can rest easy knowing their savings are safe, he says.
“Will the market come back or will it lose another 40 percent? The truth is that both of those things are possible,” says Bodie. “One thing we do know is that the stock market has not become any safer now.”
A typical diversified portfolio of blue chip stocks lost 40 percent of its value last year. Bodie likens those holding onto stocks now to Las Vegas gamblers who lost big but are staying at the table trying to win it back.
“My attitude is, ‘I lost 40 percent, I'm going to walk away,’” says Bodie.
For over 30 years, Bodie has been preaching the virtues of conservative inflation adjusted investments for retirement savings. He favors Treasury Inflation-Protected Securities, or TIPS, and Series I Savings Bonds, or I-Bonds. The US government began offering TIPS in 1997 and I-Bonds the following year.
Bodie says he follows his own advice and did not lose a penny in the recent market meltdown.
When he was a student at MIT, Bodie studied under Robert C. Merton, who later won the Nobel Prize in Economics. Bodie and Merton co-authored the textbook Financial Economics. Bodie's latest book is Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals.
A professor of management at Boston University, Bodie also is on the finance faculty at the Sloan School.
Bodie has harsh words for Wall Street and other investment interests, which he says downplayed the dangers of pouring life savings into the stock market.
“The investment industry persuaded ordinary people who don't know much about market risk that all they had to do was sit back while stocks delivered them a comfortable retirement,” he says.
The government also should have done more to educate the public about the risks of stocks, according to Bodie. “Politicians are not known for telling people things they are not going to want to hear,” he says.
For investors whose recent losses appear to mean a bleak retirement, Bodie has some suggestions. Postponing social security will boost a retirees' annual income by a guaranteed 8 percent a year, he notes.
Bodie also suggests investing in yourself. Many people remain healthy and vital for many years after traditional retirement age. They can continue to work at their jobs or find a new career, such as teaching, he says.
“My advice is do practical things that you control,” he says.
And what if you are tempted to invest in the stock market? “If you can't take the heat, get out of the kitchen," he says. "You could lose what little bit you have left.”
For more information: http://zvibodie.com/home