We are almost 5 years from the worst of the last market crash. Can we relax and catch our breath now? Is it safe for a baby boomer to once again rely on the market for a secure retirement? Is it possible to design a financial system and market economy that won’t crash? The realists don’t seem to think so. I’m one of them.
Just as most people are more interested in stories about fires than they are in the chemistry of fire retardants, they are more interested in stories about financial crashes than they are in the measures needed to prevent them. That is not a recipe for a happy ending.
I get uncomfortable when objective experts express deep pessimism about the design and structure of our financial system. Putting out financial fires doesn’t help folks like us who are trying to position ourselves for a secure retirement. We want someone to prevent those fires. It doesn’t appear that anyone is working real hard on doing that.
Systemic problems aren’t the only causes of market crashes. Terrorist attacks, wars, government upheavals, and natural disasters can all create havoc and panic leading to precipitous market declines. The past couple of decades have brought us plenty of these random events.
What is worse, no one can accurately predict how people will react to changing conditions around them.
Is it reasonable to expect a sustained period of stability in world events? Is it rational to conclude that market crashes can be stopped?
Here’s what another writer said about this recently:
Booms and busts are normal behavior in markets, because the future is so hard to predict and people are so unpredictable.
I agree with this sentiment. To believe otherwise is, as the writer said, an “impossible dream.”
No one has given me a good reason to be optimistic about our economic future. I am investing based on pessimism. This is not “the world economy is collapsing” pessimism that the gold lovers proclaim. Rather, I choose to accept that our economy is deeply cyclical and is likely to stay that way.
When it comes to retirement security, it is too risky to assume that conditions around us will constantly support positive markets. I would rather be an incorrect pessimist than a cash-starved failed optimist.
To summarize: Flaws in our financial system + rapidly changing world events + unpredictable human behavior = inevitable boom and bust economic cycles
This wouldn’t be so bad if we could be sure to invest during a “bust” and then retire during a “boom.” We know that is not guaranteed to happen to any of us.
With proper planning, retirement security can be rendered more probable than market stability. That’s the direction I’m headed. Of course, I am relying on Social Security and on the integrity of the TIPS and I-bonds I own. With these in place – absent a complete government collapse – I should be able to keep a roof over my head, take care of my health, and have enough food to eat even if the markets tank. That’s where my optimism is.