An article in last week’s issue really resonated with me because, for once, the speaker who was quoted seemed to have no truck with the oft-repeated assertion that diversification makes stocks safe investments over time.
We have been fed this line almost as gospel, especially in the last decade. And if the success of the mutual fund business in accumulating trillions of dollars is any indication, the message has worked. That message–that equities are absolutely essential to the health of your portfolio–has rarely been challenged.
Yet here was Zvi Bodie, professor-finance and economics, Boston University School of Management, pretty much pooh-poohing that idea. It’s “complete baloney to say stocks become safe in the long run due to time and diversification,” he said. “History proves that the ups and downs of the market do not cancel out over time.”
Stocks “would not have a risk premium” if they become safe over time, he maintained at an industry retirement conference held last month in (where else but) Las Vegas. Linda Koco attended and wrote the story based on a session examining new retirement paradigms that are emerging.
I think a lot of the public that have migrated to equities over the last decade or two, particularly through mutual funds, recognize the validity on a gut level of that Bodie was making.
All we’ve heard is that equities are supposed to be good for us, but that doesn’t mean we’ve come to love them–or trust them–for that matter.
What it reminds me of is this: I have a cat who needs to get liquid medicine twice a day to help with his internal plumbing problems. No matter how many times my wife and I have tried to convince Chet that he needs the medicine and that it does him good, it doesn’t work. He still tries to spit it out or avoid it every time.
Much as people have been told how they need to take their medicine, i.e., stay the course when the market is tanking, they still sell low and buy high. And they regret while surveying their portfolio’s wreckage.
And more to the point, even in their equity-linked products they want guarantees, especially when those products are what will be their nest eggs for a comfortable or a cruel retirement.
Joe Jordan, senior vice president at MetLife, touched on some similar points during his talk about the new paradigms. “We’ve developed a lot of left-brain analytic tools to solve right-brain emotional issues,” he said. This isn’t sufficient, he added, because “the left brain cannot discern something that’s unspoken or emotional” going on in the consumer.
Jordan then made a point I was really happy to see, which is that the insurance business needs to be sure consumers “understand how insurance is different from the investment point of view and how it delivers value.”
For too many years, the insurance business has felt the need to be an investment product manufacturing wannabe instead of being what it is best, that is to say, a purveyor of products that provide guarantees.
With the rise of living benefits in variable annuities, for instance, I think the business has started to catch on to what it should be doing. The fact that these guarantees have been taken up so dramatically in VAs is proof positive that the public craves safety and security.
More than anything people want their money to be around when they need it. Isn’t that what the public believes insurance is for?
And in a tough economic environment such as we’re entering now, guarantees, I believe, have a glamour all their own. We just have to see it as such.