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The retirement mantra: Diversify, prudence, and save

Question: I am VERY worried about a financial meltdown in the U.S. because of a coming debt crisis which Congress won't do anything about until its here. Where should I tell my 25 year old daughter to put her retirement savings? Susan, St. Paul, MN

Answer: A lot of people share your concern. There is so much uncertainty right now. Will the U.S. government deal with its debt without putting the country through the trauma of a financial crisis? Which of the new leaders in the Middle East be better or worse than their predecessors? Is the Chinese economy a giant bubble, or not? There are so many "known unknowns" to use former Defense Secretary Donald Rumsfeld's apt expression.

My simple answer to the uncertainty is to embrace the combination of prudent investments, good saving habits, and diversification. It's a strategy for long-term savers.

Your question reminds me of a phone call I got a few years ago from a friend. A brilliant sociologist, I've always marveled at his grasp of history, his ability to bring the history of ideas alive, from the insights of Max Weber to the intellectual journey of Alexis de Tocqueville.

Well, he was running errands one day around the time the mortgage giants Freddie Mac and Fannie Mae were taken over by the federal government. He listened to some public radio commentary on the global market meltdown, and one financial expert rattled off the reasons to sell everything and get out of the market immediately. Yet a few minutes later another money manager came on and said buy stocks since it was a once in a lifetime buying opportunity. "What am I supposed to do?" he asked me. "Who's right? And what should I do with my retirement portfolio?"

Now, with the benefit of hindsight the buy-stocks advice was right. But it could have been wrong. I'm more optimistic than you about America's economic future and I still think our political system will messily rise to the occasion. (The reason is simple: 80% of world trade is denominated in dollars and the cost of failure in the end is simply too great. ) But again, I could be wrong.

History is full of shocks and surprises, unexpected twists and turns, both on the downside and the upside. You've probably heard that over the long haul stocks have sported an average annual return of more than 10%. Yet the stock market story is far more complicated and violent than pictured by a casual glance at the soothing 10% annual return figure. And stocks have langyuished for long periods of time, too.

Investors have struggled to cope bear markets and bull markets, cataclysms like World War 1, World War II, the global market meltdown, mass enthusiasms for radical new technologies like railroads, radio, the microchip and the Internet, political changes such as the New Deal, Reaganomics, and the New New Deal.

Yet we have to manage our money well through all this tumult, and differing opinions. The stakes are evn higher now since we're managing our own retirement portfolios.

That's why I would tell your daughter to have a well diversified portfolio in stocks, fixed income securities like Treasury Inflation Protected Securities, emerging markets, certificates of deposit, and so on. The old financial proverbs that preach diversification and dollar-cost averaging remain wise counsel to anyone investing for the long haul. There is safety in diversification.

I would stay prudent, sticking with high quality securities. My own feeling is too much of the investing for retirement conversation is about reaching for risk in the hope of earning outsized gains. But that's also a way to suffer through big losses.

I would also urge her to save more within and outside of her retirement accounts.

About the author

Chris Farrell is the economics editor of Marketplace Money.


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