Retirement investors suffer as economy catches up to Wall Street

August 9, 2011

Retirement investors have struggled with a Jekyll and Hyde economy these past two years, where Dr. Jekyll lives very well on Wall Street while Mr. Hyde runs roughshod over a terrified Main Street.

On Main Street, the jobless rate tops 9 percent and 14 million residential mortgages are underwater – a figure Deutsche Bank thinks will hit 25 million, or 48 percent of all home loans, before the housing bust ends.

On Main Street, the economy hasn’t respond to ultra-accommodative monetary policy. Near-zero interest rates don’t matter because because there’s so little demand for credit to hire people or to buy post-bubble real estate.

Meanwhile, free money has been great for Wall Street. The companies that created Main Street’s problems through the reckless behavior that led to the financial crisis barely missed a beat, and they went right back onto the gravy train.

Now, the Jekyll and Hyde economies demand to be reconciled. The markets finally realize what Main Street has known all along: we’re stuck in a grinding, recessionary economy with no end in sight. You can’t even call what’s coming now a double-dip, because the first downturn never ended.

Monetary policy is of limited use. Interest rates already are at rock-bottom; we’ll probably see more easing soon, even though QE2 hasn’t helped much. Meanwhile, fiscal policy has been focused in exactly the wrong area — deficit reduction rather than job creation and direct stimulation of the economy.

Of course, most Americans have a stake in both the Jekyll and Hyde economies – we live on Main Street, but our retirement money is invested on Wall Street. So the obvious question: what now? I’ll be blogging about strategies for retirement investing all week, but here’s my opening comment to those of us living in the Mr. Hyde economy, don’t create a self-inflicted wound by selling out of panic during this plunge.

Equity prices fell 57 percent from the market peak on October 9, 2007 to the bottom on March 9, 2009, and the value of equities in 401(k) plans or IRAs plunged by $2.8 trillion. As the chart at right shows, a full $1 trillion of the losses occurred in retirement accounts held by older baby boomers approaching retirement, according to the Center for Retirement Research at Boston College (CRR).

As always, older investors had the largest account accumulations. They literally had the most to lose at the market’s bottom.

Unless you think the world as we know it is coming to an end or you absolutely need the money right now — hold on.

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[…] Now, the Jekyll and Hyde economies demand to be reconciled. The markets finally realize what Main Street has known all along: we’re stuck in a grinding, recessionary economy with no end in sight. You can’t even call what’s coming now a double-dip, because the first downturn never ended. Read the full story at Reuters Money. […]

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[…] looked at the performance of 7.1 million 401(k) accounts, comparing returns for investors who made changes to their portfolios during the 2008-2009 market […]

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