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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

No Pain, No Gain

by Ben Stein

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Posted on Thursday, January 31, 2008, 12:00AM

"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.

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217 Comments

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  • DON E - Wednesday, February 13, 2008, 1:53PM ET  Report Abuse

    • Overall: 5/5

    Thanks for the reminder Ben; Sometimes we lose sight of our history lessons.

  • Yahoo! Finance User - Wednesday, February 13, 2008, 12:09PM ET  Report Abuse

    • Overall: 5/5

    Classic Ben. The ignorance exhibited by Bens' critics is stunning. I lived through the 70's bear market and heard all the same nonsense then.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 7:13PM ET  Report Abuse

    • Overall: 1/5

    just index, that's the best way. Look what happened at Citicorp. Even they didn't see it coming.

  • DanielB - Tuesday, February 12, 2008, 5:38PM ET  Report Abuse

    • Overall: 5/5

    I agree that conventional wisdom greatly overestimates the percentage of short term bonds and cash one should hold at all ages. The amount that should be in cash and short term bonds should depend mainly on how soon you plan to use the money, not on your age. Not even a retiree need keep more than a year's worth of living expenses in cash and bonds.

  • dick schlong - Monday, February 11, 2008, 11:08PM ET  Report Abuse

    • Overall: 3/5

    income average every month

  • Raymond - Sunday, February 10, 2008, 4:26PM ET  Report Abuse

    • Overall: 4/5

    So True

  • Chow - Sunday, February 10, 2008, 5:36AM ET  Report Abuse

    • Overall: 4/5

    slow and steady does not generate emotional high but sure to win.

  • Kevin - Friday, February 8, 2008, 10:38PM ET  Report Abuse

    • Overall: 4/5

    The nimrods on this site should spend their time researching the companies they want to invest in, and not reading Mr. Stein for hot stock tips. That is not the purpose of the column. Ben writes for a mass audience, the people who don't subscribe to the WSJ, and provides them with a basic technical and emotional direction, through good and bad times. Lighten up, people -- long term success is the goal, not short term maniac profits.

  • Bryan - Friday, February 8, 2008, 9:17AM ET  Report Abuse

    • Overall: 4/5

    Ben Stein is well BS I mean Ben Stein. It was simplistic just to remind us not to get emotional. In all actuality the market as whole makes gains 4 to 6 weeks out of the year the rest of the time its flat or down . But individual securities may fly high for the whole year do some research and reavaluate your risk.

  • Yahoo! Finance User - Friday, February 8, 2008, 6:37AM ET  Report Abuse

    • Overall: 4/5

    Thanks Ben. An old addage, buy low and sell high, but still very valid. Thanks for reminding your readers of what should be obvious.

  • Yahoo! Finance User - Thursday, February 7, 2008, 9:47PM ET  Report Abuse

    • Overall: 2/5

    Not sure why Yahoo is still paying you for stories. So, your basic story here is to buy low during a bear market. Same thing any other adviser would give to a long term investor, you give no added value. Really, you're supposed to be 'an expert', give some value over and above common sense.

  • Yahoo! Finance User - Thursday, February 7, 2008, 6:51PM ET  Report Abuse

    • Overall: 1/5

    Tom Paine also said, "All national institutions of churches, whether Jewish, Christian or Turkish, appear to me no other than human inventions, set up to terrify and enslave mankind, and monopolize power and profit." I like Ben Stein the celebrity but really, his financial advice is just more "Ben Steinery".

  • Ryan - Thursday, February 7, 2008, 4:38PM ET  Report Abuse

    • Overall: 2/5

    Nobody has a crystal ball, but to any of Mr. Stein's listeners be very careful of following his advice this time. Since the early 80's his strategy of buying on the dips has worked, but given the current conditions there is a good chance we are entering a very long period where the markets don't move much at all. Just like the 1970's when the Dow was up and down but ended the decade right where it started while at the same time inflation tore into investor's portfolios, we may now be headed into a similar period. When permabulls like Ben Stein finally capitulate is when you will probably find a tradeable medium term bottom in the market. If we somehow make it through the next couple of years without finding ourselves in a severe recession we will then be faced with a huge wave of baby boomers retiring which will have a major deflationary effect on our country and will consequently add to the downside in stocks. Preparing your investments for the current and future events over the next few years can help you to preserve your purchasing power, while listening to people like Ben Stein will likely have you going down with the ship.

  • Al - Thursday, February 7, 2008, 2:41PM ET  Report Abuse

    • Overall: 1/5

    "In the long run, we're all dead." - John Maynard Keynes. The market has shown periods of stagnation or decline which can require several decades to recover. The best strategy there is not to buy on the way down, but to become a spectator to the misery.

  • Yahoo! Finance User - Thursday, February 7, 2008, 9:41AM ET  Report Abuse

    • Overall: 3/5

    "This time it's different." LMAO. Kids...

  • Yahoo! Finance User - Thursday, February 7, 2008, 9:05AM ET  Report Abuse

    • Overall: 5/5

    thats good advice, esp the last bit of it, slow but sureness is the long term key for beating the stock market and maximising your gains from the stock.

  • DanielM - Thursday, February 7, 2008, 12:37AM ET  Report Abuse

    • Overall: 5/5

    Mr. Ben Stein, There is one point in your article that I personally believe holds a ton of merit. The SEC rescinded the uptick rule on July 6, 2007. This rule was enacted in 1934, shortly after the beginning of the Great Depression so good companies would not be short-sold out of business at the whim of what would now be known as hedge funds. In other words, there now exists the grave possibility that good companies that hire good employees will cease to exist, not because the companies themselves did anything wrong, but because a billion dollar hedge fund needs to find profits somewhere on the short side. It is like the lottery in opposite. A hedge fund may pick any company at any time, devalue it by shorting it to a point where it declares bankruptcy, and then cover the short position raking in massive profits. I suggest that honest investors reject this decision by the SEC, and demand that Christopher Cox reinstate the uptick rule. Thank you Mr. Stein

  • Don - Wednesday, February 6, 2008, 2:35PM ET  Report Abuse

    • Overall: 2/5

    Warren Buffett has more money than Ben does (and you and me.) In 1969, saying there were no bargains, Warren liquidated his investment partnership, waited out two bear markets, and then bought cheap stocks with both hands. The last few years, saying there were few bargains, Warren accumulated cash which totaled $47 billion last year. He has gotten too wealthy to repeat the 1969 tactic of liquidation. I am betting that Warren will be able to buy cheap stocks sometime soon, making his shareholders and the Gates Foundation a lot more money. It is rational to follow Warren's lead, rather than Ben's, and maintain financial reserves much greater than conventional wisdom would suggest.

  • Yahoo! Finance User - Wednesday, February 6, 2008, 1:28PM ET  Report Abuse

    • Overall: 1/5

    Thankfully I know exactly when to buy. It's when this idiot finally says sell.

  • miklrz - Wednesday, February 6, 2008, 1:16PM ET  Report Abuse

    • Overall: 5/5

    mmoore800646 offers the following dubious advice for retirement as an alternative to long term investing: "How about just saving money consistently." Well, ok, but you had better be saving a lot of it!! To replace even 75% of your salary with retirement savings at no or low risk savings rates (say, 3%) you'd have to be socking away 30% of your pre-tax salary for your entire career, and that's assuming you start at age 21, through 65! And if you didn't start until say, age 35, bump that savings rate to about 45%!! Good luck with that.

  • RhondaW - Wednesday, February 6, 2008, 12:58PM ET  Report Abuse

    • Overall: 4/5

    As always, Ben's advice is very good. However, it is only valid in a long-term context. He often says that he has no idea what to expect in the next 6 to 12 months. His advice is for how to make money in 5, 10 or 20 years. Ben is not a stock trader, he's a long term investor. For that reason, I think that a lot of the criticism her is misplaced. Yes, we may have a recession in the first half of 2008. In previous articles, Ben has pointed out that this could actually be beneficial to long-term stock investors. Stocks go down going into a recession and rise as we come out of one. By the time the recession is over, you will have missed the best opportunities to buy. Those who sit on the sidelines and wait for good news, will watch those of us who are investing now make the lion's share of the gains.

  • Yahoo! Finance User - Wednesday, February 6, 2008, 12:16PM ET  Report Abuse

    • Overall: 1/5

    24/7 Bulls are great, but take a look at the charts. Last summer the smart money started coming out of the market, you need to look at all industries(Value Line is a great source). Also look at the charts from 2000 to 2003 when the fed was cutting rates. Be patient

  • Yahoo! Finance User - Wednesday, February 6, 2008, 11:01AM ET  Report Abuse

    • Overall: 1/5

    Clearly Ben Stein has no respect for the majority of Yahoo users who give him a vote of no confidence, One Star. He is simply an embarrassment, and should not be paid for dubious advice. How he can take money for bad advice, and not be held accountable is shameful.

  • Yahoo! Finance User - Wednesday, February 6, 2008, 10:44AM ET  Report Abuse

    • Overall: 5/5

    Ben is giving great long term advice. Ben's analysis is not for all those short term, "get rich quick" investors.

  • Yahoo! Finance User - Wednesday, February 6, 2008, 10:37AM ET  Report Abuse

    • Overall: 5/5

    Another great article!! Thanks Ben

  • Mark - Wednesday, February 6, 2008, 9:59AM ET  Report Abuse

    • Overall: 1/5

    What a bunch of crap. Guess Ben is being paid by the Wall Street investment companies also. Investing in stocks is the only way to retire? Really? How about just saving money consistently. This recession is going to be very bad, since the housing bubble is going to be bursting for several years. It was fueled by stated income loans, which are by and large no longer available, so they can't be refinanced, and many people will loose their homes, causing a foreclosure cylce similiar to the early 90's, or worse.

  • Missouri Mike - Wednesday, February 6, 2008, 9:44AM ET  Report Abuse

    • Overall: 5/5

    It nevers sounds sexy but it is the truest, soundest investing advice out there. Unfortunately, it takes many years for people to finally come around and "get it" - if they ever do!!

  • Pearl - Wednesday, February 6, 2008, 8:22AM ET  Report Abuse

    • Overall: 1/5

    I meant to give this story five stars. Been putting money in weekly and know that there will be a big pay out two years from now.

  • Newton - Wednesday, February 6, 2008, 3:00AM ET  Report Abuse

    • Overall: 1/5

    Like I commented 2 months ago its easy for anaylsis to say after the fact "we sure got that wrong" and who is left holding the "portfolio".

  • Midwestern countryboy - Wednesday, February 6, 2008, 2:54AM ET  Report Abuse

    • Overall: 1/5

    For what it is worth, Ben is trying to assure people that all will be ok in the future. Many informed investors/savers believe otherwise. For it is what we are seeing, i.e., housing in a depression state, financial corps close to default except for foreign capital intervention, manufacturing jobs being eliminated everyday, etc. and he continues to say "invest for the long term". Today that approach just doesn't work. Ben you need to admit that the current financial situation is dire and safety of principal should be priority number 1. It is my opinion that our economy will get much worse, job losses will continue, bankruptcies will increase, and the divide between have and have nots will continue to increase. Not the picture of a rosey economic future. The main reason for my dire outlook is the debt structure of our people and government. This country has lost its way regarding financial responsibility. Like a fool with a new credit card, spend, spend, spend, has become the mantra of many. The party is ending and the piper is here to collect.

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