Ben Stein How Not to Ruin Your Life

"These are the times that try men's souls." So said a great patriot, Thomas Paine, during the difficult days of the United States' infancy.

Now we're enduring trying times for investors. Scary, unsettling times. The market, as I write this, as measured by the Dow, is down about 14 percent from its high last fall. Unemployment is up, although still at a low level by postwar standards. The volatility in the market is breathtaking, with 200 points up or down on the Dow now routine.

Stress, Mania, Terror

Foreign markets are no longer the haven they have been for the last several years. Emerging markets have taken wild swings, often down, and even my favorite, the EFA -- the exchange traded fund for large companies in developed European nations, Australia, Japan, and New Zealand -- has been under severe stress.

We now know that one maniac trader at a huge French bank, Societe Generale, apparently caused wild gyrations two weeks ago by his trades and the bank's attempts to unwind them. We further know that immense hedge funds with billions of dollars available to play with are now able to move markets drastically down. That's because of a change in exchange rules that allows short sales, even without a prior uptick in the price of the stock in question. The traders make fortunes, we lose our lunches.

In other words, these last few months have been terrifying. Not just unsettling -- terrifying.

Agonizing Times 

These are the times when the serious investor has to bear down and realize the facts of life. These are especially the times when financial advisors, purveyors of financial products, brokers, and insurance salesmen have to draw upon their inner resources to make certain they do their best for their clients.

This is also a time when such clients rightly wonder if it's safe to do anything with their money besides keep it in savings accounts or CDs. Why should people saving for their retirement go through the pain they're going through right now? Why go through the agony?

Well, here are a few reasons.

The Price We Pay

Over periods of more than a few years, in all but a few times over the last 53 years, broad indexes of stocks have outperformed cash or bonds (including reinvestment of dividends). Measured over long periods this out-performance has been breathtaking, on the order of two to one over 10 years and much more than that over two decades or more. (By broad indexes, I mean the S&P 500 or the Dow.)

For investors who are starting early or in middle age, diversified baskets of solid stocks are the only way they'll earn enough money to fund a decent retirement. The pain and anguish we as investors feel as stocks fall day after day, week after week, month after month, is simply what we go through to get that extra capital gain. It's painful, cruel risk, but that's the price for those super returns over long periods.

There are ways to mitigate the pain: As my pal and colleague Ray Lucia has said, it's vital to keep a good chunk of cash or near-cash to draw on for your needs. That way, you don't have to sell stocks when they're down to get the money you need. To that end, there are variable annuities that lock in gains in markets even if the market tanks. (Investors should be aware that there's a fee for this, and evaluate whether they want to pay it.)

Cash In

It's sensible to keep some money in safe bonds: treasuries or highly rated corporates, preferably of medium duration because long bonds can take a wild beating if inflation rears its head. Bonds rarely fall as far or as fast as stocks, and often move in the opposite direction from stocks. These, too, are ballast in stormy weather.

The usual rule is that middle-age workers should have close to 50 percent of their assets in bonds or cash equivalents, and more as they get older. My respectful view is that we don't need anywhere near that much cash and bonds in our portfolios as long as we're working and have income from labor. We don't need to miss out on the opportunities for superior growth from stocks as young or even middle-age investors until we're out of the labor force, and must be extremely careful not to lose what we can't replace.

What should be the exact amount of cash and bonds to have at various ages? Again, there's an old saw that you should have 100 percent minus your age in stocks, and the rest in bonds and cash. (So, if you're 40, you should have 60 percent in stocks; if you're 60, you should have 40 percent in stocks, and so on.) Again, I would say that's too conservative over the long haul, but only each investor knows how much risk tolerance he or she has. Discuss this with your advisor.

Throw Out the Lifeline

The main fact you should bear in mind every day is that over long periods, money is made when the stock market is down, not up. As my financial guru Phil DeMuth says, "You make money in bear markets. You just don't know it until later."

If you have enough money to invest without scaring yourself and your family, now is a fine time to buy broad indexes of stocks. Just don't expect these buys to pay off right away. As I've said many times before, my advice is strictly for long-term investors.

To my readers who are financial advisors and brokers and planners, please help your clients understand this. Get on the phone with them and calm them down -- you're their lifeline in the storm. Now's the time for you to step up and help your clients make the right choices: Remind them that slow and steady in the market wins the race. It's simple, but it's true.