Most people have had a very cursory introduction to the financial markets. Their exposure to equities usually involves a 401k that they received from their job. The majority believes that the best way to invest in the markets is to put money into stocks or mutual funds and hold it there until they retire. This thinking is very flawed and will not ensure that you are ready to retire on your schedule or that you would even be able to enjoy a comfortable retirement.
So where did this line of thinking start and why is it still proposed by financial managers today? Well if you think about the time in a person’s life where they are most likely to work and invest, it would be in their late 20’s to 50’s. Most people are involved in building their career and contributing to their company retirement plans. If we look at the largest part of the population, the baby boomers (born 1946-1964), they were in their prime working years from 1974 onward. This means that there was a large influx of money entering into the equity markets. Since the mentality was to buy low and sell high, it is safe to assume that the money was used to buy stock, not stock trade. This would cause the markets to rise.
In 2011, the first of the baby boomers were 65 and starting to retire. Many have to supplement social security benefits with money earned from investing (see: investing for beginners). There is an argument that there are more employed people in the American workforce. While the number of total workers has gone up, it is not growing as much as the population as a whole. The Bureau of Labor Statistics reports the participation of labor force percentage of the population is dropping rapidly.
The reduction of workers contributing to the equity markets is evident as the amount of money under management in mutual funds has shrunk. Without the buyers flooding money into the markets, they are not able to withstand economic events as well as they have had in the past.
Investors have now lived through at least two equity market bubbles. They are not just once bitten, but are extremely shy! The largest raisers of money in the mutual fund markets are no longer equity funds. There is a push into safety and the perceived safety of bonds.
With the Quantitative Easing policy of the Federal Reserve and volatility of the equity markets, we are experiencing a bubble in the bond market. Unfortunately, this bubble will burst just as all do. The problem is that when bond prices drop fast, the interest rates rise as dramatically. This will likely be accompanied by high inflation that will easily outpace the meager gains buy and hold investors will have.
So what should investors do? Just as the markets have transformed, we too must adapt to the new market. No longer can we buy and hold. We need to be proactive in our investing and learn how to time the moves of the markets. This is possible using technical analysis with the proper education. It is not complex, if you use simple, rule based strategies, you can improve your investment portfolio and be much better prepared for your retirement.