While most of us don't have pensions these days, we do have IRAs. Unfortunately, it looks like many Americans may not be making the most of these retirement vehicles.
IRAs currently contain more than 25% of Americans' retirement assets. Unfortunately, our friends at the Employment Benefit Research Institute recently reported that just 39% of IRA assets are in stocks; 22% are in money funds (such as money market funds and CDs); 14% are in bonds; 12% are in balanced funds; and 14% are in other assets, according to its most recent look at its IRA database.
Long-term mismatch
Most of us have many years until retirement. For some, it's decades away. And history has shown us that money tends to grow fastest in stocks. Check out how often stocks beat bonds during various rolling periods between 1871 and 2006, per the research of Wharton Business School professor Jeremy Siegel:
|
Holding Period
|
Percentage of Time Stocks Beat Bonds
|
| 1 year |
60.3% |
| 5 years |
71.3% |
| 10 years |
82.4% |
| 20 years |
95.6% |
| 30 years |
100.0% |
Source: Stocks for the Long Run, Jeremy Siegel.
Troubling details
Granted, because of the effort involved in collecting its data, the EBRI only has figures as of the end of 2008. But the data offers a few more interesting details:
- Folks with smaller accounts have a greater percentage of their assets in stocks, which is generally good. But that's often still not enough. You may be 100% in stocks, but if you're 45 and your retirement savings total $30,000, you need to be socking away much, much more, and investing it effectively.
- About 22% of those 70 or older have more than 90% in stocks. That's worrisome, since it's generally good to have a bigger portion of your money in bonds by the time you're in retirement. Still, don't jump to conclusions. If those stocks are relatively stable dividend payers, such as National Grid (NYSE: NGG ) or Waste Management (NYSE: WM ) , then they'll generate solid, bond-like income.
Demand for the electricity that National Grid processes is close to a sure thing, and the company is expanding into solar energy as well. Waste Management isn't likely to see its volume of collected garbage shrink much, and it's busy expanding its recycling businesses. Also, remember that these IRAs are often just part of overall nest eggs. Folks might be holding bonds in other accounts.
- About half of those younger than 25 have less than 10% of their assets in stocks, and nearly 20% have more than 90% in bonds and money funds. That's very alarming, because the minimal risk they're taking means they probably won't get significant returns, either.
Risk and return
Naturally, everyone's personal risk tolerance is different. Just make sure you give stocks proper consideration when saving for your future. Sure, the market can crash anytime, as we were reminded in 2000, 2008, and just a few days ago. But it has always recovered from its falls -- eventually.
Back when the Internet bubble burst, lots of widely held stocks cratered. Companies like Apple (Nasdaq: AAPL ) and IBM (NYSE: IBM ) saw their stocks tumble. But Apple was brewing new offerings that would take the world by storm, and IBM continued to sell its hardware, software, and services to a needy world. As a result, those stocks came roaring back.
Recent downs and ups
In 2008, the market dropped almost 40%. But it resumed an upward trend after that, as did most of its component stocks. SanDisk (Nasdaq: SNDK ) , for example, lost almost three-quarters of its value in 2008, but thanks to strong demand for its memory devices, it's recovered all its losses and then some.
Some stocks can take longer to recover. That's why investors need patience and conviction. Short-sighted investors might exit Corning (NYSE: GLW ) because of crash-related fears, but they should ask themselves whether sales of LCD TVs and other devices will eventually pick up, boosting Corning's revenue.
Many of us would do well to invest rather heavily in stocks, at least when we have five to 10 years or more until retirement, and especially when we're young. You can carefully select very promising stocks, or you can just opt for a simple broad-market ETF such as the Vanguard Total Stock Market ETF (VTI) or the Vanguard Dividend Appreciation ETF (NYSE: VIG ) . Either will expose you to the broad market in one fell swoop. Make the most of your IRA, not the least of it.
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