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How Stocks Can Keep You Safe in Old Age

24 September 2007 - Features - Editor

Why does 401(k) not suffice as a sole means of saving for life in retirement? How can stocks overcome the limits to which traditional routes of savings are subject? These questions have troubled citizens of the most advanced economies of the world. Rising life expectancies and uncertainties about inflation in the decades to come exacerbate problems related to providing for security in retirement. However, a large part of the problem is also related to the fact that the salaried class is not sufficiently focused on the long-term aspects of their financial needs.

The United States spends some $360 billion on about 44 million citizens, by way of social security. There are many who believe that even such colossal dimensions may not be enough to meet the future retirement needs of people who are financially self-sufficient today. Social security reform is such a fractious subject that no one can be certain of which form it may take over the course of time. We all need to look after ourselves!

Stocks have important roles to play in helping people build meaningful sources of funds. This is not to say that every investment in stocks can be successful, but to highlight the fact that financial literacy about judicious transactions seems to have become a fundamental economic imperative. Why is trading in stocks so complicated? Should it not be simple to buy as many blue chips as possible, and then simply hold on to them?

The Uneven Field of Competing for the Best Stocks

Large financial institutions have armies of experts with professional training and experience, who compete against individual retail investors to realize optimal cash flows from stocks. It is not uncommon for them to spread canards to keep prices low, or to offer spurious advice on the best stocks to buy, in order to earn private commissions and incentives.

Unfortunately, there are few safeguards against undesirable and even illicit forms of financial advice. Even those who have built up sound baskets of savings are never really safe from tempting offers made by unscrupulous advisors. The dice seems to be heavily loaded against unsuspecting folk! Blue-collar workers, women, and minorities, are often the most vulnerable groups in this regard. However, Enron has proved that scams do not discriminate, and even majority groupings can be susceptible.

The nature and needs of life in retirement have changed since the concept of organized employment first took concrete shape . There is an inescapable requirement to build portfolios of stocks which can meet modern cash flow expectations without taking significant risks with respect to capital amounts.

3 Top Ways to Build a Portfolio of Great Stocks

It may be tempting for individuals to surrender savings to mutual funds, or to stay away from stocks, in view of the hurdles in the way of fair competition against professional investors with deep pockets. However, there are ways to build reliable portfolios without help from experts, within limited means. A first step is to develop a valid business model for each sector of the economy in which you hold stocks, so that you know when to hold securities, and when to liquidate holdings. Another issue is to invest in specific lots, so that you never run out of liquidity to meet either planned or unforeseen cash outflows. The third and final step towards building a nest egg of security for comfortable living as a senior citizen is to incorporate the balances of diversification in to your portfolio, so that you do not have too many eggs in any single basket. The Rule of Five, which states that only one of your stocks can outperform the stock market, is not necessarily true, especially during general downturns in the economy. Every combination of dividends and appreciation of stocks can last for years of financial well being in the autumn of life.

The oases of stable lifetime employment, followed by adequate and assured pensions, seem to recede with disturbing rapidity, as the ruthless competition, and dizzying rates of change overpower us in the new millennium. Everyone can aspire in these uncertain times, to build stable portfolios of stocks, using investing skills with consummate and informed ease. Investing is more of a habit than a revelation, so it is better to practice buying and selling stocks in gradual steps over a period of time. Building wealth, contrary to some opinions, has little to do with gambling and other forms of tempestuous trading! The most successful players combine formal techniques with practical experience, and there is no single route to success. Come to this site regularly, and contribute to our shared knowledge of how to work the stock market.

Works Cited

Ferri, R, 2003, Protecting Your Wealth in Good Times and Bad, McGraw-Hill Professional
Grassley, C, 1999, Preparing Americans for Retirement: The Roadblock to Increased Savings: Congressional Hearing, DIANE Publishing
Johnson, C, and Solomon, J, 2007, Investment Pitches Prey on Elderly, Washington Post, September 5 2007, Page A01
Katz, D, and Evensky, H, 2006, Retirement Income Redesigned: Master Plans for Distribution, Bloomberg Press
Mitchell, O, Meyers, R, and Young, H, 1999, Prospects for Social Security Reform, University of Pennsylvania Press
Pearl, D, and Williams, E, 2003, All About Retirement Funds, McGraw-Hill Professional

 


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