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Challenging Convention

According to one college professor, having a portfolio free of stocks may be wise for some retirement strategies.

1Dec

Calling in a professional manager may prevent emotions--or apathy--from dictating the allocation of employees' nest eggs. But is it any safer to trust asset managers who use the standard theories of investing?


For Boston University professor Zvi Bodie, the answer is a resounding no. According to Bodie, all the hand-holding in the world won't boost retirement savings, because the financial-services industry is severely biased toward equities.


Bodie recently surveyed four online advice services (Quicken, SmartMoney.com, mPower, and Financial Engines), and concluded that the educational materials and investment advice provided are "often dangerously misleading." That's because none offered a risk-free option, even when he plugged in data indicating he was extremely risk-averse and nearing retirement.


Even when portfolios are well diversified across equities, "stocks are not safe in the long run," he argues in his book Worry-Free Investing, which will be released in April 2003 by Prentice Hall. As evidence, he notes that prices of put options, which hedge against a stock-price drop, tend to increase as time horizons get longer. "If stocks truly were less risky in the long run, then the cost of insuring against earning less than the risk-free rate of interest should decline over time," says Bodie. Further, he challenges the conventional wisdom that stocks offer a hedge against inflation, noting that in the 1970s, one period of prolonged inflation, most stocks performed poorly.


In the book, Bodie and co-author Michael Clowes detail alternative retirement-saving methods, including annuities with payouts linked to inflation and college-tuition rates. Stocks are not ruled out, but are for investors "willing to accept the risk of losing some of their money."

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