Friday, April 22, 2005

You can't diversify time

Martin Mayer makes a good point in his NY Times op-ed column about personal retirement accounts. The argument in their favor has always been that over the long term, investments in stocks yields higher returns than in bonds. Mayer points out that if, as the Bush plan requires, one is forced to buy an annuity on the day that you retire, there is a great deal of variability in the results. The stock market and interest rates can change a great deal over a very short period. Two people retiring within 6 months of each other will get very different results — from the same portfolio. Whether or not the long term returns on stocks is favorable, there is always the short term issue of what the value is on the day you cash in.

One might attempt to fix this problem by averaging the cash-in value over a period. Mayer doesn't deal with this possibility. But even here, the value of stocks this year is a lot different from what it was 3 years ago. If one averages over a long enough period, it's hardly an investment account any more. It becomes a government program that depends on the overall health of the economy, as all government programs ultimately do.


JC said...

Your entries are interesting to read. :) I missed your movies reviews. Where are they?!

JC said...

I also tried out the google feature. I don't like it very much because I usually like highlighting parts of the text while I'm reading. =/