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Ben Stein How Not to Ruin Your Life

Ben Stein, How Not to Ruin Your Life

Bear Market Advice

by Ben Stein

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Good (811 Ratings)
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Posted on Friday, July 18, 2008, 12:00AM
Now that the three major U.S. stock indexes have hit bear market levels what shall we do? Well, let's ponder....

First of all I never thought things would get this bad, and I still think the market's reaction is overdone, to put it mildly.

The aggregate losses in the U.S. stock market since the peak last October have totaled roughly $3.5 trillion dollars. Not billion. TRILLION. That is, the speculators and traders have knocked roughly $3.5 trillion off of the value of all publicly-traded stocks in this country.

Supposedly, this is due to the losses in mortgages held by banks and other financial institutions. But those losses in total might amount to - after recoveries on foreclosure - at most $200 billion. The losses to stock market investors - you and me, kid - are roughly 18 times what have been lost on mortgages.

Why?

Some say the markets are tanking because the cost of oil is skyrocketing. Surely this is true. Or is it?

The U.S. imports roughly 12 million barrels of oil per day. If the price is up by sixty dollars a barrel that is an additional cost to the nation of roughly $720 million a day. This is a staggeringly large sum. Breathtakingly large.

In one hundred days, it amounts to $72 billion. In a year, it amounts to (very roughly) $250 billion of added costs to the nation. Again, these are staggering numbers. But this is still one fourteenth, or about just seven percent of the loss the stock market has suffered.

In sum, there is a problem of proportion here. The losses in the stock market are simply staggering compared with the real world event metrics that supposedly caused them. This suggests the likelihood that these moves in the market are temporary and will be reversed in time.

But in the meantime, what do we do?

For one thing, we get ourselves some guaranteed retirement income in the form of annuities or variable annuities. In these troubled days, we want to farm out as much of our risk as we can to the insurers who sell annuities and let them do the hedging.

Variable annuities are now available with a feature that captures much of the upward movement in stocks while providing a floor to limit possible losses. Yes, you have to pay for the hedge, but it's looking awfully sweet now. Talk to your financial advisor pronto.

Second, you might want to delay retiring if you can. You do not want to have to draw down your retirement funds now while the market is down. If you do, you will likely face a serious shortfall of retirement savings in future.

If you do have to retire, live as carefully as you can, drawing down as little as you can, until the glorious day the market recovers. Even then, consult carefully with your advisor about how much you can safely withdraw. If you have the backup of guaranteed retirement income, you are even better off.

But do not fall into despair. Bear markets last on average less than two years. The recovery is often very abrupt. This one will end, too.

If you have the money to buy, now is the time to buy the broad indexes (links associated with the top ETF for each index) - the S&P 500 (SPY), the Dow Jones Industrial Average (DIA), the MSCI Emerging Markets Index (EEM) and the MSCI EAFE Index (EFA) for developed foreign markets.

Don't denude yourself of cash, but if you can spare it, buy now and in ten years you will be glad you did. The sun will come out tomorrow. It always does. And as the saying goes, "the darkest hour is just before dawn."

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308 Comments

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  • JOHNNY BOY - Tuesday, August 12, 2008, 8:01PM ET  Report Abuse

    • Overall: 4/5

    GOOD INFO

  • Wesley - Wednesday, August 6, 2008, 8:22AM ET  Report Abuse

    • Overall: 4/5

    But investing in annuities are questionable - once you give your money to the insurance companies it is out of your control - forever.

  • Yahoo! Finance User - Monday, August 4, 2008, 8:26PM ET  Report Abuse

    • Overall: 3/5

    Live within your means, don't borrow what you can't afford, and save. It's that simple. Get your government to follow these same basic rules. http://nahnopenotquite.wordpress.com/2008/05/23/america-we-cant-afford-it/

  • Yahoo! Finance User - Monday, August 4, 2008, 6:55PM ET  Report Abuse

    • Overall: 2/5

    Sorry Ben, but the bottom is not here yet. Cash will be king very soon when the real bargains arrive. Build cash reserves and liquidity with a Mortgage Savings Account and save mortgage interest. Google "Mortgage Savings Accounts" and educate yourself on these powerful financial tools that haved been successfully used in Australia and the UK for 20 years. It's time Americans got a fair shake too.

  • Yahoo! Finance User - Monday, August 4, 2008, 9:09AM ET  Report Abuse

    • Overall: 5/5

    I can't agree more with Ben! There will always be chicken littles out there, but not Ben! Since 1950 there have been 9 bear markets. How many do you think felt like they were the end of the world? But how many were? NONE! And this one won't either! BUY LOW AND SELL HIGH!

  • Andy - Saturday, August 2, 2008, 4:24AM ET  Report Abuse

    • Overall: 3/5

    this seems like "something D-0-0 economics"...VOODOO ecomomics....

  • DH - Friday, August 1, 2008, 12:05AM ET  Report Abuse

    • Overall: 5/5

    Ben Stein is a very smart man. Sometimes he tell us what the truth is even if it's not popular. That is why he's right, and most of the comment posters here aren't... Although, I don't think I'll be buying an annuity anytime soon.

  • Yahoo! Finance User - Wednesday, July 30, 2008, 11:55AM ET  Report Abuse

    • Overall: 5/5

    Ben is one the few rational voices regarding finance. The doom and gloom naysayers will ( yet again ) be proven wrong. Thanks Ben.

  • Murray - Wednesday, July 30, 2008, 1:07AM ET  Report Abuse

    • Overall: 3/5

    395 comments, and 395 different opinions of why were are in this mess, and what to do about. The only certainty is this: when the dimbulbs start saying that we are only going down, down, down - worse than the Great Depression - real estate will never recover - that is the time to buy.

  • James - Tuesday, July 29, 2008, 6:36AM ET  Report Abuse

    • Overall: 5/5

    Ben is a wise man. We should listen to him.

  • Yahoo! Finance User - Tuesday, July 29, 2008, 12:58AM ET  Report Abuse

    • Overall: 1/5

    I would NOT listen to BEN......The government is struggling to hold up financial instutions......IF THAT IS NOT A SIGN THEN WHAT IS!!!!!

  • FrankR - Monday, July 28, 2008, 3:08AM ET  Report Abuse

    • Overall: 1/5

    Ben Stein is a moron. I am short and my speculative portfolio is up close to 200% for the year...... (heavy options action)

  • omar - Monday, July 28, 2008, 1:54AM ET  Report Abuse

    • Overall: 1/5

    Ben recommended Merrill Lynch at $75 in mid-2007. The price of that stock is now $27.50. So, based on this track record, are you going to follow his advice? If you want to listen to someone who has actually got it right over the years, listen to Peter Schiff.

  • Yahoo! Finance User - Monday, July 28, 2008, 12:18AM ET  Report Abuse

    • Overall: 1/5

    For a year this guy has advised us to hold stocks. Now he says we have bigger problems than he realized. This he blames on "speculators" and traders". No, Ben, it is because every buyer realizes that stoicks are worth less, and a lot of sellers agree. Moreover, Stein assures us that the real loss from suprimes will only be about $200 billion (where in the world does he get that number?) In lieu of stocks, he now recommends annuities, whic have two unpleasant qualities: (1) one has to pay a fee to purchase them, which is equivalent to a capital loss, and (2) they are merely contracts to pay money, and hence valuable only insofar as the company writing the annuity remains solvent. There certainly is no "floor" on returns; returns can be quite negative if the issuer of the annuity founders. And in an economy in which Freddie Mac and Fannie Mae are at risk of failure and Bear Stearns has imploded completely out of existence, where are the magical companies we are to trust to remain solvent? Stein also informs us that recessions typically are of short duration; maybe, but what we are concerned about is the market, and we have seen times when the market took 25 years to recover from a loss (1929-1954). I don't know if anyone knows this, but Ben Stein is NOT an economist, and his advice is very dangerous.

  • Yahoo! Finance User - Sunday, July 27, 2008, 7:30PM ET  Report Abuse

    • Overall: 2/5

    The markets always move farther than anyone thinks they will (even Ben!) that's why its best to just go with the flow (like at pages.sbcglobal.net/acom ) and follow the stats when deciding what to buy or sell. So here's Ben giving advice when he admits even his previous thoughts were wrong! Ben also obviously doesn't understand that stock market values are a MULTIPLE of earnings, they are not the actual earnings themselves (duh!). If banks lose $200 billion their value does not decrease by $200 billion, it decreases by $200billion times the P/E ratio. And guess what? the average P/E ratio of companies is 15-20 so stock market losses of about 18 times the actually losses from the mortgage mess is not unreasonable. Hey Ben if you don't understand P/E ratios you shouldn't be writing about finance!

  • Yahoo! Finance User - Sunday, July 27, 2008, 12:25PM ET  Report Abuse

    • Overall: 1/5

    Hi Ben! I bought the financial sector based on your advice and was down 30%, I bought again and doubled down and was down another 30%. What do you think I should do now? If my wife finds out that I have lost over 50K then I am in big trouble. I really thought you sounded smart in your columns and all those Fox News and CNBC shows and that your advice was good but things don't appear to be working out. What do you think about the financials now?

  • Alan - Sunday, July 27, 2008, 12:01PM ET  Report Abuse

    • Overall: 4/5

    Ben has it basically right, although he does slight the ripple effect of so much 'bubble equity' being burned off in Real Estate. His advice is extremely sound. I am always a little amazed by how bitterly he is attacked by comments. Anyone who has lived through a few cycles of the market should see the soundness of his advice. I attribute the negative reactions to Ben's comments to lack of experience or buying into the 'new paradigm' thinking.

  • MrPhelps - Sunday, July 27, 2008, 11:52AM ET  Report Abuse

    • Overall: 1/5

    Usually Ben has some pretty good arguments, but with this one his calculations are not very detailed and he fails to list the overall cost to the consumer due to the increasing costs of the oil speculation debacle. Consumers are self interested beings who are cutting back on discretionary spending to cover the cost of food and gas and a few extra mortgage payments here and there to avoid being upside-down.

  • Dan G - Sunday, July 27, 2008, 8:26AM ET  Report Abuse

    • Overall: 5/5

    Thanks Ben - Let's not forget that negativity is what sells. Go back to the news in the most robust economy we have ever had and you will find that negative news is what dominates. It's like selling sex, it's easy and it draws readers in like bugs to a light..... Keep up the great work.

  • Andrew - Saturday, July 26, 2008, 7:33PM ET  Report Abuse

    • Overall: 1/5

    Gotta love Ben Stein. Always the permabull optimist. Optimism is cool when it squares with the facts. This time it simply does not. Wake up and smell the Starbucks. (Just don't invest in them) The United States economy is on the verge of a meltdown that's going to make the Great Depression look easy. Years of deficit spending by the Washington syndicate are coming home to roost. Hank Paulson, Ben Bernanke, and their frat brothers on Wall Street have virtually guaranteed it. People should have listened to Ron Paul. He told the truth.

  • whonext - Saturday, July 26, 2008, 2:40PM ET  Report Abuse

    • Overall: 3/5

    I usually am in total agreement with Ben, but I feel this advice is a little too generic. I feel that it is not possible to beat the market consistently by trading, but that said, I did take some money off the table the last time the market was over 13,000. Just didn't seem logical to me. Now that the market is down around 20%, I may move back in. Could it decline further? Of course. But there is no sure way to predict the exact bottom, and as the market recovers, I will have made an extra 20% on the money I pulled out earlier. For me, its not about a home run, but singles. Moving some money out at a high and back in 20% lower is a doubleor triple for me. I do not need this money for 15-20 years, and if the market does not recover by then, we'll all have bigger problems. One problem with Ben's article is his reccomendation of annuities. I would qualify the statement with the advice that only investors who absolutly need this money in less than 5 or 7 years use annuities. The cost does not justify their use, in my opinion, until you are about to or are already retired and you have no cushion.

  • John - Saturday, July 26, 2008, 10:29AM ET  Report Abuse

    • Overall: 5/5

    Ben, as usual you give good advice. However I would add that "what you do" is very much a function of your age, goals and circumstances. I know this makes it more complicated, but it is a necessary complication. A very young person in his or her 20s should be salivating at the opportunity this downdraft presents, but someone nearing retirement might want to salivate much less profusely. Hopefully people near retirement had an appropriate allocation to stocks, bonds and cash to begin with, but if they didn't it's never too late to start. So the advice I would give? Do what you should have been doing all along. If you haven't started yet then simply start to allocate appropriately. One other note: The banking system is shaky and I suspect the true underlying cause to be debt, not just the bad mortgages. Consumer debt and federal government debt. This will be a chronic drag on stocks going forward, but not a reason to get out of the market! We simply need to lower our expectations for returns. The 80s and 90s are gone, but I am optimistic about the returns the market can provide in the long run.

  • Yahoo! Finance User - Saturday, July 26, 2008, 9:38AM ET  Report Abuse

    • Overall: 4/5

    Ben Stein comments from an investor's point of view, not a trader's. Academic studies always show that very few ever beat the indexes, long term. Now IS a time to buy them if you have cash available that you don't need in the next couple of years.

  • Yahoo! Finance User - Saturday, July 26, 2008, 8:47AM ET  Report Abuse

    • Overall: 1/5

    He still recommends to buy) What do those tricked by him in 2007 think now? I am keen to know. And he recommends to buy broad stock index funds - is it insane or what?

  • Yahoo! Finance User - Saturday, July 26, 2008, 1:41AM ET  Report Abuse

    • Overall: 5/5

    Stein is the most responsible personal investment advisor our there.. solid advice for the personal investor.

  • Yahoo! Finance User - Saturday, July 26, 2008, 1:12AM ET  Report Abuse

    • Overall: 1/5

    Ben, I hate to say but this is the first time its in sight that America might default on its debt. This is worse than the great depression. A bailing out of fannie and freddie will double our debt, spur huge inflation, give taxpayers a huge debt burden with no upside for the taxpayer when fannie and freddie recover. This is worse than most people think. It hasnt even started yet. Banks will continue to fail left and right and the dow will probably go down to 8 or 9000 if not much lower. The dow priced in gold is already near 6000.

  • Kevin - Saturday, July 26, 2008, 12:07AM ET  Report Abuse

    • Overall: 4/5

    The name of the column is "How Not to Ruin Your Life" and that is what Ben Stein tells us. Not how to get rich in three days. All of you mechanics trading on your computers hoping to be three-day profiteers -- just go on believing the silly rhetoric from the cable doomsayers. The US still wags the rest of the world, and our economy is solid and growing. We all go to work every day and our productivity and GNP are above all others. In a world of lies the weak are conquered easily. As FDR said, we have nothing to fear but fear itself. What ever happpened to the America where people had faith in the future, from their hearts -- based on their doing the best job possible and not from futures contracts or short bets? The American engine purrs silently beneath this ruckus, waiting for traction...this restless economy will flatten the 5-minute pundits with double-digit performance, once the real estate and financial losses are digested. Time is the variable here, and too few people realize it.

  • SeymourS - Friday, July 25, 2008, 1:47PM ET  Report Abuse

    • Overall: 1/5

    If you ask Ben what time it is, he'll probably say "Buy, buy, buy." Terrible essay, as usual.

  • Yahoo! Finance User - Friday, July 25, 2008, 10:41AM ET  Report Abuse

    • Overall: 3/5

    As usual Ben gets paid for regurgitating investing 101. No regard for current conditions or any specific advice. The article is worth what you paid to see it. Also, iaats2h has a purdy mouth.

  • Yahoo! Finance User - Friday, July 25, 2008, 9:22AM ET  Report Abuse

    • Overall: 1/5

    Thank you Ben, keep writing your articles, and please don't stop. I time my shorts on when you write an article. I wait one or two days, then I short the hell out of the market. Worked everytime since January. Please keep giving your terrible advice, so I can time the market right and make some money.

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