If You Need Stocks, You Can’t Afford Them

According to economist Zvi Bodie. In a Money magazine article he says that if you need the high return of stocks to reach your goals then you can’t afford to invest in stocks. You should read the article to get all the details but this is a general summary of what he says. He states that stocks are too risky an investment for retirement investing and suggests a portfolio of TIPS instead; you should only invest in stocks what you can afford to lose. He also says that you should save 20%-30% of your income or more so you will accumulate enough money for retirement despite not having the higher returns from stocks.

This is an interesting point of view and I can agree with it somewhat. As he states when you are saving for retirement you can either sacrifice by having a lower standard of living now, working longer, or taking more risk in your portfolio. If you are able to maintain a low standard of living and save a large percentage of your income than the returns you receive are not as relevant as when you are saving only 10% of your income.

Personally, I am still going to be investing in stocks. They are risky but since I have started saving late in the game and don’t have much income I need the high returns of stocks to accumulate enough money to retire. Even if I were young and just starting out I don’t think I would put 100% of my money into TIPS though. That just seems too conservative to me. Once I have accumulated all the money I need then I might consider putting a large percentage of my investments in TIPS or some other form of guaranteed income but until then I will stay invested in stocks.

What do you think of Bodie’s advice?

7 thoughts on “If You Need Stocks, You Can’t Afford Them”

  1. I think if you can be interested enough in stocks (or, more precisely, in studying and understanding what makes a company successful) to give it the attention needed, you have a better chance at meeting your retirement goals with stocks than any other investment. Unfortunately, 90% of folks who buy stocks either chase hot tips or follow the herd in some other way.

    You don’t even have to be very smart to be successful at it. If you know how to look for a bargain on Black Friday, you’ve got 70% of what it takes to succeed in the stock market.

    • My Frugal Miser – That is an interesting concept. I do like to think that I am a better than average investor but most people probably think they are better than average. Obviously they can’t all be correct.

  2. I think Zvi Bodie is handing out some pretty lame advice.

    Of course you should take advantage of the high returns on stocks (or stock Mutual Funds) for retirement. Unless you are approaching retirement age, you have a very long time horizon to save for retirement and the extra couple of percent will make a huge difference compounded over decades. You will also have plenty of time to recover through stock market cycles.

    As for saving 20-30% of income, this is a great idea. Unfortunately, most people who are raising a family and buying a home won’t be able to pull this off. They will be lucky to save 10% early in their working career. So, putting your retirement savings in investments that barely beat inflation doesn’t seem prudent to me.

  3. i put all my money into the stock market after the crash. at first i diversified. then i moved all my money into ford. if only i had put ALL of my money into ford around $2 a share when i started buying it, i’d probably have enough money to live off of investment income and perhaps the odd job here and there (should there be another economic downturn). but i diversified because that’s the safe, smart thing to do. and so, i’m still in the rat race. smart me.

    diversifying is what you do when you’re already wealthy. when you’re just another chump in the rat race, you have to take risks to get out of it. or you can take 20 years and do it the “safe”, diversified way.

    it seems fairly obvious to me that we are in the middle of an economic recovery. any money put into an index fund right now will probably see a 30% gain over the next year or so.


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