Laureates show the way, post-Bush

None of the Nobel laureates offered a financial forecast. It’s folly since a recession, housing turmoil and credit-market woes cloud the outlook and will probably last into next year.

Beating inflation over time, though, was a more prevalent theme at the Oct. 23 Boston University conference where the Nobel laureates were asked to talk about retirement saving.

The organizer of the conference, Zvi Bodie, a finance professor at Boston University, has long counseled in favor of using TIPS as a bulwark against not only inflation, but against stock- and bond-market risk.

Even if deflation is the next demon to ravage the global markets — where prices and spending decrease broadly — Bodie says TIPS offer some protection since the securities provide a floor on nominal value, which is a guaranteed return.

“The most vulnerable investors should be pouring their money into TIPS,” Bodie said.

Buying Stocks

What about stocks? Isn’t there some great value out there? Warren Buffett inspired confidence when he wrote on Oct. 17 in the New York Times: “Over the long term, the stock market will be good.”

Most people aren’t Buffett. They won’t buy at low prices and hold. They will jump in and out of the market and get burned.

“History teaches no lessons,” warns Paul Samuelson, who won his Nobel Prize in 1970, and at age 93 said he would consider retirement “when I grow up.”

“You don’t know when to get back in,” Samuelson added.

Bodie argues that while diversifying among stocks may be attractive, the risk never diminishes.

If you need your money within the next seven years, most of your portfolio should be in TIPS. If you need a guaranteed income stream with some tax breaks, seek highly rated municipal bonds.

You also need to undergo the ultimate reality check: Some of what you lost in home equity or stocks may never be regained.

“A lot of wealth is gone and there’s no reason for it to come back,” says Merton, who estimates that US$4 trillion has been lost in real estate and about US$8 trillion to US$9 trillion has evaporated in global stock markets.

Where to turn in this gloom? You can’t reliably rebuild your portfolio by taking on more risk and chase the next bubble. Focus on guaranteed, inflation-indexed income when you need it most.

Being introspective will help. Take stock of what you do best — your human capital — and invest in it. “Think how valuable human capital is,” Merton added. “If you are doing what you like, it’s a pretty big deal.”

John F. Wasik, co-author of “iMoney,” is a Bloomberg News columnist. The opinions expressed are his own.

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