At the close of trading Monday afternoon, the S&P 500 was down by more than 10 percent from its recent highs. On Tuesday morning, it opened with a gain of more than 300 points.
So what to do?
Over the past several days, we’ve been told this “tumble” is a “buying opportunity,” and we “shouldn’t panic” and sell off our stock holdings. Instead, we need to “stay the course.” Others all but accused us of being a bit greedy. When USA Today stepped forward to remind us that “the broad U.S. stock market was still up by almost 200% since March 2009,” you could almost hear the reporter muttering “what are you complaining about?” under his breath. And fair enough.
Yes, panicking is the worst thing someone can do when the stock market is volatile. It’s also the exact thing we should expect to happen.
Since the 1970s and 1980s, Americans have embarked on an experiment in how to help people prepare for retirement. Instead of increasing Social Security payments, or encouraging more employers to offer pensions, we instead pushed voluntary savings and investment options such as Individual Retirement Accounts and employer-offered 401(k) plans. They were pitched as all-but-surefire ways for us to retire as millionaires. All you need to do is give up a small luxury—like your daily Starbucks latte—and just wait 30 or 40 years.
This strategy, for the most part, has been an utter failure for all but the wealthiest Americans. Regardless of the short-term machinations of the stock market, the do-it-yourself retirement revolution has left the United States on the verge of a retirement crisis, with the Center for Retirement Research at Boston College projecting that a sizable minority of Baby Boomers and a majority of Gen Xers will experience falling living standards in retirement.
What went wrong? A good percentage of people cannot or will not save the money at all, finding it all but impossible in an economic climate where salaries are stagnating as costs of housing, health care, and education continue their inexorable rise. Others will invest badly, or see a decent chunk of their savings eaten away by fees imposed by the financial services industry, fees they collect whether the markets go up or down. Still others simply don’t receive much help at all from their employers. The result? A recent AARP poll discovered that more than two-thirds expressed fear that they would outlive their savings and a solid majority expressed “concern” that their employers could change their retirement savings benefits at a whim. As a result, just under half of Baby Boomers say they plan to work past the traditional retirement age of 65, though its questionable how realistic a plan that really is for many. A combination of age discrimination, ill health, and family responsibilities appears to force many out of the paid workforce, no matter what they intended to do.
Yale University professor Jacob Hacker calls this The Great Risk Shift, this handoff of planning, from society and government to the individual. And it’s forced individuals to be almost solely responsible for everything from investing acumen to good luck.
Cheerleaders—and even people simply trying to make the best of things—like to point out that on a long-term basis, stocks are still a good investment. Jeremy Siegel, the University of Pennsylvania professor famous for espousing this view, estimates that stocks gain more than 6 percent annually over a more than 100-year period. That’s better than pretty much any other investment out there— but that doesn’t help people feel less scared, or frightened.
Not surprisingly, the less money people have on hand, the less they want to do with the stock market, which they appear to view as a giant casino, with odds that don’t favor the little guy or gal. Last year, the Wall Street Journal broke down data from the Federal Reserve’s Survey of Consumer Finances to show that a majority of Americans reduced their stock market participation between 2007 and 2010, with only the wealthiest 10 percent of households increasing their investments.
So what do Americans want? Well, one thing people appear to think would help them with their future planning is an increase in Social Security payments. Last year, the left-leaning Lake Research Partners found just under 80 percent said they thought benefits should be increased by having wealthier Americans pay more into the system. This viewpoint transcended party lines, garnering support from 90 percent of Democrats and 73 percent of Republicans.
Do this, and we will almost certainly see a lot less panic over stock market performance.