Ben Stein How Not to Ruin Your Life

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."