My philosophy on investing for retirement

While running for Congress, I participated in seven or eight candidate forums, and most of the questions in those forums were predictable – abortion, guns, immigration, and global warming. But one question threw me for a loop.

The moderator at KLRN public TV asked me to describe the new public programs that I would push for to help people prepare for retirement if they were currently living paycheck-to-paycheck. The question was difficult from a number of aspects, the most obvious that, as a conservative, I wasn’t in the business of pushing for new government programs.

The tricky aspect of question was that it seemed to be related to retirement savings, but that only masked the real underlying problem, which is living paycheck-to-paycheck. Anyone living paycheck-to-paycheck can’t save for retirement until they quit living paycheck-to-paycheck, and most financial guidance is focused on that objective – things like cutting your expenses and reducing your debt. But my post today is not for those who are living paycheck-to-paycheck. Rather is for those who already have some extra money to put away for retirement.

My investing philosophy has five fundamental considerations:

1. Don’t stuff your money in a mattress. People joke about stuffing money in a mattress. I feel the same way about any money that is not invested in stocks. Money is either working or it is sitting on the sidelines. If your money is not in stocks, you are essentially playing like a small-time banker who loans out money and receives a little interest. Everyone knows that significant financial rewards are reserved for businesses entrepreneurs. If you invest in stocks, you are an entrepreneur.
2. Root for a booming economy. If you have your money parked in bonds or cash, while your friends have theirs in stocks, you might be tempted to root for the stock market to do badly. I hate that feeling. I want to root for the economy to soar, not for it to tank.
3. The stock market is not Las Vegas. Although stocks are risky, they are fundamentally different than gambling. Stock prices go up and down wildly because of speculation, but the underlying value of a stock depends on its future profits. Most corporations regularly return handsome profits, and those profits don’t evaporate into outer space. Rather, they are used by the corporation to acquire additional assets and those assets are reflected in the long-term direction of their stock price.
4. Stocks almost always out-perform cash and bonds. Until recently, financial advisors pointed out that the stock market out-performed cash and bonds over every 10-year period except the Great Depression. Then last year, there was a lot of talk about the stock market losing money over a 10-year period. While that is true, please remember that this period includes investors who bought into the market at the height of the dot.com boom in 2000 and then sold out at the bottom of the mortgage crash of 2009. Yes, those people lost money in the stock market, but their timing was incredibly bad. In virtually every other scenario, buying stocks was the right move.
5. Proper asset allocation. Almost every financial advisor suggests that investors shift most of their 401k-money out of stocks and into cash and bonds as they reach age 50, assuming that they will start withdrawing from the 401k at age 59 or 62. My experience with professionals at my previous employer USAA is that employees may retire at 59 or 62, but they don’t seriously tap into their 401k at that time. Instead the 401k-money sits there while the employee taps into a pension, social security, or other assets. Thus, I think the correct advice for asset allocation of 401k accounts is to stay in stocks until you get within 5-10 years of making significant withdrawals from the 401k. That will mean leaving a much larger percentage of the 401k-money in the stock market during the early part of your retirement.
6. Index funds. John Bogle of Vanguard has convinced me that index mutual funds make sense for most of us investors because of their low cost. And even the world’s greatest investor Warren Buffett of Berkshire Hathaway says that most investors should be in index funds instead of stock-picking. But I enjoy stock picking, so I do it. Although my investment in Warren’s stock has been mediocre, I have had great success with stock in my fitness club – Lifetime Fitness – and my dad’s favorite car – Ford. If you are familiar with a company’s operation and prospects, I think it is a good bet to invest 5% or 10% of your money in that company.

Think about getting the boat with me – investing in stocks. Whether you pick your stocks or invest in mutual funds, remember that a rising tide floats all boats.

Source:mkueber001.wordpress.com