Commentary: The Trouble With Boomer Nest Eggs

Jeremy Siegel, meet your disciples--a whole generation of them. Judging by the results of a new survey, affluent baby boomers are believers in Stocks for the Long Run--the Wharton School professor's 1994 text that said stocks, not bonds, are the safest place to put any money you're planning to keep more than a couple of years.

In a survey conducted for United States Trust Co. of New York, 92% of 150 boomers polled say they've benefited significantly from the '90s bull market and 90% say they're leaving their gains in the market. These baby boomers expect stocks to pay hefty 12% annual returns in the first decade of the 21st century. So just how well have these rich boomers done? Why, since 1993, their stocks are up...46%, or 6.5% a year.

That's not a typo. Yes, the Standard & Poor's 500-stock index, on track for its fifth year of 20%-plus gains, is up 218% since mid-1993. Even the broader market, as measured by the Wilshire 5,000, has grown 198%. "If 6.5% is all they've gotten from their equities, they've done something wrong," says Roy Diliberto, incoming president of the Financial Planning Assn.

Odds are, they're doing a lot wrong. The investment confidence that boomers display, not just in this survey, but in the rush toward do-it-yourself money management, may well be misplaced. The paradoxical result: Today's boomers, entering their peak years for saving and investment before retirement, may be following strategies that are simultaneously too conservative and too risky.

These boomers certainly talk like stock believers. "We did the survey in October, and even all the volatility of that month didn't shake their optimism about equities," notes Jeffrey Maurer, president of U.S. Trust. They're confident that the market is going to pay off for them: 56% say their primary goal is to build assets to fund a comfortable retirement at a target age of 58--just five years away for the oldest members of the generation.

But what they say about the market isn't backed up by how they invest. These boomers have just 44% of their assets in domestic and international stocks--far below the 60% even a conservative financial planner would recommend. They're holding a sizable 27% of their assets in cash or money-market funds, and 20% in bonds.

CHASING WINNERS. It's true that bonds and cash won't drop 20% of their value in a year, the way stocks sometimes do. But research by Siegel and others shows that short-term market volatility is the last thing investors should worry about when building a portfolio to cover a 25- or 30-year-long retirement. An allocation with less than 50% stocks won't deliver the growth needed to support spending over such a long period--and one good bout of inflation could devastate such a "conservative" mix.

The survey doesn't probe these investors' buying and selling patterns. But Diliberto, president of RTD Financial Advisors in Philadelphia, figures he can diagnose where they're going wrong. "Most people chase last year's winners," he says. "They buy stocks or funds after they've posted their big gains, and they sell losers before they have a chance to turn around." Couple that with a failure to diversify, and "it's not surprising that people don't get the returns that the overall market earns," Diliberto says.

What should these boomers do? Not surprisingly, U.S. Trust says they should hire a money manager: "Even with all the information available to investors in the Internet Age, they still need professional assistance," Maurer says.

But Diliberto says do-it-yourselfers can match or outperform the pros--if they set clear goals and stick with their strategy through the market's ups and downs. Today's boomers may feel confident they can reach their goals. Putting that faith into action is the challenge ahead.

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