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401(k) reality check

If the last 10 years have taught us battered and bruised 401(k) survivors anything, it's that financial planners and market bulls are blowing smoke.

October 04, 2009|Joe Queenan | Joe Queenan writes frequently for Barron's, the New York Times Book Review and the Guardian. His most recent book is a memoir, "Closing Time."

Across the street from Madison Square Garden stands a building that sports an electronic scroll reporting the latest movements in the stock market. One afternoon in September 2008, I stopped outside and phoned my daughter, who worked in a high-rise across the street. I asked if she would like to come down and have a cup of coffee. She would. But she had a few items to tidy up first, so I would have to cool my heels. While I was waiting, I kept an eye on that scroll bar, as the stock market went down 300 points. I couldn't have been standing there much more than 25 minutes.

In 2008, such previously unimaginable disasters were routine. The Dow would be up 200 points, then down 400 in a matter of minutes. One day it lost 8% of its value. These cataclysms are ingrained in my psyche because I used to wait downstairs for my daughter a lot, so I would gaze up at the scroll, watching the world disintegrate before my eyes. It was like regularly going to a movie theater that showed only one film: "The Texas Chainsaw Massacre."

Lately, the visceral memory of these horrors seems to have retreated into the realm of mythology. These days, I see more and more reports about the market stabilizing, about the little guy dipping his toes back into the water. The old catch-phrases are returning: We are in the midst of one of the great bull markets in history; March was a once-in-a-lifetime buying opportunity.

Balderdash. The current bull market is a classic sucker rally in the middle of a bear market. This happened all the time during the Depression. The recent 50% bounce still leaves the Dow about 4,000 points below its all-time high. March was not a once-in-a-lifetime buying opportunity; it was a once-in-a-lifetime salvage opportunity. It was a chance to buy back your lost shirt while conceding that your pants are gone for good.

Even more infuriating are the "experts" advising people how to invest the money they plan to retire on. On several occasions, I have seen articles in which financial planners or academics discuss the optimum amount of money retirees should take out of their 401(k)s in their twilight years. Usually, that number is pegged at 4%. But one article in the New York Times suggested that this figure might be overly cautious. Based on a reasonably plausible projected rate of return, retirees might be able to take out as much as 6% and not have their nest egg run out before they buy the farm.

Presumably, this forecasting technique was developed by Rip Van Winkle, working in conjunction with Pollyanna and Dr. Pangloss. The idea that anyone could make solid, meaningful estimates of the amount retirees will be able to withdraw from their 401(k)s a few years down the road is top-shelf lunacy. If you started calculating how much you could withdraw from your 401(k) back in 1999, based on the "traditional" average annual return of 7% to 9% on stocks, you would be dining on Alpo today. Unless you were adept at ducking in and out of the market, or a master short-seller, or canny enough to buy Apple at six bucks, you haven't earned a nickel in the stock market since the millennium dawned. Even if you took the sage advice of the wizened pros and diversified across a wide spectrum of investments -- stocks, bonds, real estate, cash -- you still got annihilated.

The idea of forecasting what a portfolio can reasonably be expected to earn over the next 10 to 20 years seems to be based on the belief that the events of the last 10 years were a statistical anomaly, a fluke. Yes, we had a crash in 2000 that caused the market to lose almost half its value. Yes, we had another crash in 2007 that caused the Dow to lose more than half its value. Yes, everyone who dreamed of retiring on X amount of money got hosed. But now, happily, things have gone back to normal.

The suggestion that order has been restored -- now that cooler heads have prevailed and George W. Bush is gone -- and that the markets will now proceed in a stately, decorous fashion is like betting that college kids will stop drinking as soon as they understand that it's dangerous. The assumption is that we will have no more bubbles; that the sharpies who fleeced the public during the last two bubbles have either retired, seen the errors of their ways or run out of ingenious ways to bamboozle the public.

The facts suggest otherwise. Already, as reported in The Times, Wall Street is devising cunning, dangerous new investment vehicles. And more are on the way. Con artists don't just go away. They find new ways to con people.

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