When long-term investors panic

May 22, 2009

The WSJ published a rather odd column by Neal Templin on Thursday:

My company retirement accounts, despite what I thought was a relatively conservative mix, were down close to 35% in early March from the fall of 2007. That, in turn, forced me to do some painful thinking…

I have good reason to be fixated on the health of my 401(k). It took me 20 years — my entire time at the Journal — to accumulate it, and it represents all our retirement savings…

Since I told [my wife] a few months ago of our losses, she started tearing open the envelopes from Fidelity Investments to see “how much poorer I am.”…

The whole experience makes her wonder about my push to keep maxing out our 401(k).

“I think maybe I could have spent more and lived it up a little,” she says.

There’s a fair amount of pretty woolly thinking here. For one thing, retirement funds are just that — funds put away with the express intention of not touching them until a point pretty far off in the future. Because they’re so long-term in nature, people can invest in riskier instruments than they otherwise might do, since there’s no reason for them to sell when the market is low, and they can ride out periods of volatility: they have no immediate need to raise cash.

In that sense, anybody with a 401(k) has a huge advantage over hedge-fund managers, say, who live in fear of quarterly redemptions and who will be asked for money just when the markets are at their lowest.

Given that the single biggest advantage that Templin has over hedge-fund managers is that he didn’t need to sell his stocks after they dropped, what did he do? Sell his stocks after they dropped. “Holding 50% stocks was simply too risky in a turbulent era,” he says. “I concluded 30% was the right level.”

But here’s the thing: the riskiness of stocks is a function of how expensive they are. The cheaper stocks get, the less risky they become, and if a 50% allocation to stocks made sense when stocks were expensive, there’s a good case to be made that your allocation should actually rise when they become cheap.

What’s more, Templin and his wife seem to have a particularly unhealthy way of looking at their retirement savings. Does Templin add up all the money that he put into his 401(k) over the years and sorrowfully compare that sum to what the account is worth now? No — that’s a calculation he never makes, and for all we know it would show him still in positive territory. Instead, he picks the single point in time when the value of his 401(k) was at its absolute maximum, and then compares its current value to that peak.

If you invest in a risky asset class like stocks, your portfolio will nearly always be worth less than it was at some point in the past. You know that, when you retire, you can ruefully pick a date and say “we should have retired back then, we would have had more money”. But you still invest in stocks because you’d much rather have a portfolio go up to $3 million and finish at $2 million than you would have a portfolio which boringly and steadily rises to a final value of $1.5 million.

Unless, of course, you’re Neal Templin, who seems to think that in the first case he would have “lost” a million dollars, and that in the second case he’d be going out at an all-time high and blissfully happy. He doesn’t seem remotely interested in the amount he has accumulated over the course of his 20 years at the WSJ: instead, he’s only interested in the difference between that amount and its mark-to-market value on a certain date chosen to make him feel as miserable as possible.

As for his wife, she seems if anything even more ignorant: she doesn’t even seem to appreciate that the less money you save, the less money you save. If she had spent more and lived it up a little, then the drop in their retirement account would have been smaller only because the retirement account itself would have been smaller. The only way to get a bigger retirement account is to save more, not less.

All of which goes to reinforce my message to Justin Fox — the idea of long-term shareholder value is simply meaningless. If anybody should have an eye on the long term, it’s people with retirement accounts which can’t and won’t be touched for decades yet. But instead they obsess so much over a single year’s drop that they radically alter their entire asset-allocation strategy at the worst possible time, and choose to sell steadily into a rising market. That’s just human nature: you might think you’re a long-term investor, but when put to the test, it turns out that, really, you’re not. And if you’re not a long-term investor, then you should never have been investing on the basis that you were.


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