Managing retirement funds

NPR's Morning Edition this morning had a long feature on rebalancing portfolios, titled "Rebuilding a nest egg after the Great Recession".

And as is customary for stories of that ilk, they fail to mention the most obvious solution to avoid massive losses when the markets crash: Trading retirement funds out of stocks into cash.

The NPR story hit all the old hackneyed points:

• Bonds for safety, stocks for opportunity
• as though bond prices weren't hammered hard with the collapse of capitalist finance in 2008.
• Keep buying shares during the downturn to lower your basis so you'll build a really great portfolio
• which is fine unless the collapse in prices catches you at a bad time, like, a few  years before retirement, as has happend to so many of the Baby Boomer generation.
• Put your money in a life cycle fund that adjusts the mix between stocks and bonds as you age so you won't have to think about it
• as though not thinking about your money was the right way to manage it.

The NPR story, like all media reports I've read about managing savings, basically assumes that Americans are idiots when it comes to their own money, and certainly can't be trusted to make decisions about their funds.

Certainly, our society conspires to keep people ignorant.

The schools teach how to be a consumer, but not how to build capital and to invest.

The limited choices and restrictions on trading within most 401(k)'s force workers to avoid making decisions.

 And conventional wisdom everywhere is focused on saving, by cutting out that Starbucks coffee every morning, rather than on making money grow as a way to accumulate wealth.

The end result is that we are indeed a nation of consumers, fit only to decide whether we want a latte or a double americano in our cardboard cup.

There are two simple alternatives to the present madness (and you won't hear them on NPR).

One is to start trading your 401(k) mutual funds. Some work I did at the start of year shows how you could be quite profitable in your S&P 500 index mutual fund by trading only a few times in a decade (a level of trading no fund manager will object to).

The system is simple. Go to cash if last closing price of the month in the S&P 500 is below the 12-month moving average. Go to stock if the last closing price of the month is above the 12-month average.

Simple and profitable.

See my year-end review, "Looking Backward", and my subsequent essay "Monthly Breakouts", which gives formal trading rules.

That method alone, if widely followed, would spare American workers a lot of financial pain.

The second alternative is aimed primarily at young people, just starting out. But it can also be profitably adopted by people of any age.

It concerns saving. Everyone from President Obama downward is saying, with great authority, Americans must save more. Which is fine, but where do you put your savings? A savings account of any sort means you're guaranteed to lose money, because the interest rate will be less than the inflation rate.

Setting money aside to lose value would seem to be a very foolish game.

The answer is to put money in stocks, and then trade in and out using either a long-term method, such as that mentioned above, or shorter term methods. Profit aside, the main benefit is that people will learn at an early age how to manage money, and to amass capital.

I think that kids should start to learn about trading stocks when their 16 years old, and everyone should be an experienced trader by age 30. No exceptions.
 
The downside is that most online brokerage houses require a $3,000 minimum to open an account. There are, however, some solutions.

The bank ING Direct has a low-up-front program that allows people to get started without amassing that initial capital. Click here for the information.

Dividend Reinvestment Funds (DRIPS) are managed by the companies themelves and allow you to put money in the company's stocks each month. It doesn't encourage trading in and out, but it's a way to get started, and you can certainly do a long-term trading strategy.

Here's an Investopedia article on DRIPS.

Start small, watch your money like a hawk, and by the time you have some real money, you'll know how to manage it.

It pains me to hear such misinformation as that purveyed this morning on NPR.

I'm sure everyone reading this market letter is fairly experienced at trading and has the resources to go through a brokerage.

But we all have younger siblings, nieces, nephews and assorted cousins several times removed who could benefit from some sound information about how to manage money and turn it into capital wealth.

So I've become quite -- enthusiastic -- in encouraging people to get engaged with their money -- relatives, strangers on the bus. I hope everyone starts doing the same.