Ben Stein How Not to Ruin Your Life

It's spring. The weather out here in Malibu is fabulous, although cool at night, as always.

This past weekend, I made a roaring fire and spent the evening studying my stock brokerage statements for the past year. It made for depressing reading. I'd been up amazingly this time last year, and by October 2007 I was really feeling rich. Then came the "correction" and, wow, did my stocks have some correcting to do.

But there were lessons to be learned, and to be shared with you, my kind readers.

Two Hot Tips

The first lesson is that over long periods, I almost always do far better with broad indexes than with individual stocks. Yes, I've had many stocks that rocketed up, but when the corrections came, they tended to drop like stones. The indexes, though, tended to hold up far better. In fact, I could find almost no index funds that truly disappointed over a 10-year period.

The best ones were the foreign emerging-market and foreign developed, but even with the recent corrections the REIT index, the natural resources index, and the finance index did fairly well. Sometimes they did amazingly well. Obviously, the most dismaying was the finance index, and the best was the natural resources index. But that will change, of course -- the leader never stays the leader forever.

The other major lesson I learned is that patience is everything. If you can well and truly wait patiently through painful corrections, add to your holdings, and refrain from frequent trading, you'll do far better than if you trade frequently. In fact, there's copious data suggesting that very frequent trading causes dramatically lower returns than just buying and holding.

Cashing In

So, there are two extremely basic but useful lessons: diversify and have patience. These seem amazingly simple, even simple-minded, but they're much harder to practice than you might think. Avoiding being sucked into the siren-song madness of buying hot individual stocks takes strength of character indeed.

Now, I know what you're thinking: "Well, I would like to buy and hold, but it ain't easy. Sometimes I need money unexpectedly and have to sell. Sometimes I need to follow a friend's hot tip."

Here's where the "buckets of money" strategy of my pal Ray Lucia comes in. This has many parts, but the most basic is to keep a good chunk of cash or near-cash on hand so you can slide through the rough patches without having to sell stock.

That makes so much sense it's almost insane. But how many people do you know who actually do it? If I were able to re-jigger my financial life right now, I think the first thing I would do is to have far more cash. I guess I could do that by selling stock, but a lot of that stock is down from where it once was and I hate to sell at that stage. (I can easily forego the "hot tip" part; I've already been down that dead-end street.)

The Landscape Has Changed

OK, so now you know: diversify and hold. But I have another lesson, and it's a grim one.

When I first started this column four or so years ago, we all thought inflation was under control. No one knew why prices were so docile. Money supply was rising. The world was afire with prosperity, but prices were tame. The pre-retiree didn't need to plan on more than 2 percent inflation.

All that's changed. We don't know why, but even as the world economy is slowing, prices are rising -- and fast. Commodities, Far Eastern wages, and foodstuffs are all shooting up at frightening rates, and there are at least two consequences of this dreary phenomenon. One is that you need to save more for retirement because prices will be so much higher than they are now.

The second is that you'll want to own assets that keep pace with inflation (or "discount" inflation, as we economists say). The main ones are commodities indexes, which by definition track commodities. But another asset that typically keeps pace with inflation is real property. I know we're in a sharp real estate correction, but it's possible that the correction will be shortened by demand for real estate as an inflation hedge. Just think about it.

Hedging Against Inflation

In the meantime, I know of only one equities-based investment that explicitly keeps up with inflation -- inflation-protected variable annuities. For a fee, insurers will sell you a policy that's guaranteed to keep up with inflation. The fee isn't trivial, and you should have your broker investigate all the details.

But the key is that the insurers do the hedging for you, and you pay for that service. It's well worth looking into. My feelings won't be hurt if you don't buy it, but at least have a peek.

(In the interest of full disclosure, bear in mind that I'm an honorary spokesperson for the National Retirement Planning Coalition, and one of that organization's endless list of members is the trade association for variable annuities. Also bear in mind that they've been about the best investment the Steins have ever made.)