At the Retirement Income Industry Association's spring conference, you could almost see Jeremy Siegel standing on his head. Almost...
Siegel, author of "Stocks for the Long Run" made a powerful case for buying and holding stocks. He noted that the U.S. stock market had never posted a loss over a 20-year period.
But his proposition took a beating at the conference. So did conventional wisdom that retirees should hold stocks as a way to ensure adequate inflation-beating growth, especially those who want to make sure their portfolios last for 25 or 30 years.
Personally, I've never been able to reconcile "stocks for the long run" with the warning that "past performance does not guarantee future returns." So it was validating to hear several speakers at the RIIA conference suggest that stocks aren't reliable for retirees.
For instance, a panel of academics and advisors, moderated by Bill Fullmer of Russell Investments, dissected the "time-segmented" or "buckets" method of income planning. Specifically, they examined the legitimacy of the practice of dividing a client's golden years into five-year periods and assigning certain assets to be harvested for income at the start of each period.
The question was whether it was smart to assign risky assets like small-cap stocks to the most distant periods in the belief that, like good wine, they would "mature" in value by time they were needed for income. The panel agreed that bucketing methods can be useful, but they didn't believe that equities were guaranteed ever to mature, let alone mature by a certain date.
A book that was introduced at the conference also undermined the "stocks for the long run" notion. In "Retirement Portfolios: Building, Managing" (John Wiley & Sons, 2010), Michael J. Zwecher argued that if stocks were a cinch to grow over the long run, then the cost of hedging against the risk of equities under performing the risk-free rate would decline over time. But it doesn't.
What about the oft-cited evidence that the volatility of stock returns diminishes over time? According to Zwecher, it's true that a portfolio's average returns become less volatile over time. But the portfolio's cumulative returns become more volatile, he said.
In the conference's featured presentation, finance professor and retirement income expert Moshe Milevsky argued that advisors shouldn't encourage people who are mortality risk-averse--that is, scared of living to age 95 and running out of money along the way--to invest in stocks. "Risk is risk," he argued, and people who are risk-averse to mortality will be equally risk-averse to equities.
Such clients should use immediate annuities or, alternately, deferred income annuities (aka "longevity insurance") to lengthen the lives of their portfolios, Milevsky said. They should buy equities only with money they can afford to lose.
The conference's overall message, which happens to be RIIA's theme, is that retirees should buy a "floor" of risk-free income-producing assets before considering equities. After Wall Street's recent madness, that makes sense.
Kerry Pechter is the author of "Annuities for Dummies" and editor of retirementincomejournal.com.