My 17-year-old son had a job in 2006 and wants to start an IRA. I have been researching options for him. I have a burning question that, so far, no bank or financial adviser has been able to answer.
My son wants a traditional IRA. EVERYONE I have spoken to recommends some sort of stock-based financial vehicle. I am not understanding the wisdom of a stock-based IRA at this juncture in the market's history, and here's why:
When bush was promoting privatization of Social Security, supporters often quoted the statistic that, over its history and in spite of some dramatics spikes, the average yield of the stock market is 6%/year, ("much better than Social Security's 3% average," they said). Normally unmentioned is that the average yield of the individual investor is a mere 1%/year. There are many reasons why individual investors are making only 1% in a stock market making 6%, and presumably, all else being equal, my son would be smart enough to beat those odds.
The problem is that all things are not equal. One thing fueling that 6% yield is that the largest population group in history, the baby boomers, either individually or through company plans, have been BUYING stocks for retirement. At some point, probably starting next year when the oldest baby boomers begin retiring, the same huge population group will begin SELLING. After all, that was the whole point of buying in the first place. Now I am not suggesting they will all sell all at once, just like they did not all buy all at once, but they will have to sell and they may not be able to necessarily time their selling. They will be cashing out their retirement and may be compelled to sell when they need the money for living expenses, regardless of stock market conditions.
It seems to me obvious that stock prices in the aggregate will have to decline, reach a low, than begin to rebound and recover back to historical trends as the baby boomers move off the scene. If I buy today, I will be buying high, rather than low. After my stocks plummet, I will have to wait until they recover before I begin to see any yield at all. Why not just a few years and buy during the midst of the baby boomer sell-off?
When I ask the question no bank or financial adviser has either been willing or able to answer. They almost always fall back on the standard reply: If you are uncomfortable with buying stock, you should consider other investments. FORGET MY COMFORT ZONE. Please explain to me what is wrong with my line of reasoning. Why should I be comfortable? I have asked point-blank: Do you disagree with my line of reasoning. So far none of them do. One adviser said that even if domestic stocks decline, there is always "emerging markets" (investment in foreign stocks).
I countered, "Now you asking me to take on high risk. The first rule of investing (and coincidentally, gambling) is never risk money you cannot afford to lose. (An aside: that was another major problem with privatization—millions of little investors would be likely to lose money they could not afford to lose). So why do financial advisers keep pushing the stock market? Could it be because stock market performance is irrelevant to their ability to make money? Since they make money on every transaction, the more volatile and the more transactions, the better—for them. So what financial instrument would be best for my son's IRA?