BusinessWeek Features Zvi Bodie’s Old Advice for Newly Risk-Averse Investors

in Finance, Risk Management, SMG Hot Topics
March 17th, 2010

 

Zvi BodieAs the first anniversary of Lehman’s failure looms, BusinessWeek‘s print edition features commentary on newly risk-averse investors from Zvi Bodie, the Norman and Adele Barron Professor of Management at Boston University, who has long advocated for safer savings strategies:

A year after Lehman Brothers filed for bankruptcy, throwing world financial markets into turmoil, BusinessWeek examines the landscape for investors and Wall Street….Firms like Lehman Brothers lived dangerously and paid the price. So did many individual investors saving for retirement. In turn, investors have turned away from anything remotely risky….

These risk-averse investors are often on the right track, some advisers and academics say. The investment industry has been too cavalier about the dangers of investing, too willing to emphasize the benefits of risk and ignore the potential pitfalls. “Financial planners are experiencing a tremendous backlash from their clients,” says Zvi Bodie, a professor of finance at Boston University and a leading advocate of a more conservative investing industry. “People are being put at risk without being told how much they’re at risk,” he says….

Bodie contends that equities are just too risky for most individuals. Over the long term, stocks might tend to outperform other kinds of investments. But, depending on when you start investing and when you retire, stocks can be disastrous. While wealthy investors might be OK, most individuals can’t afford to absorb the big losses that can hit the stock market from time to time. “There’s a notion that somehow if you have a long-time horizon you’re going to outperform everything with stocks,” Bodie says. “If that were true, stocks wouldn’t be risky.”

Moreover, Bodie argues, stocks are sold as a hedge against inflation when there is no proof to this idea. Yes, over the very long term, equities have kept pace with inflation — just as they have outperformed other investment classes. But in periods of high inflation, stocks have done poorly, as in the 1970s….

Bodie advocates investing in Treasury Inflation Protected Securities, or TIPS, federal government bonds that guarantee to cover inflation. As long as they are well-priced, he also favors annuities, which provide investors with a guaranteed income stream in retirement.

From the article “The Flight from Risk,” by Ben Steverman, BusinessWeek (print edition), September 10, 2009.  See article online