Option Millionaires

[uranium-pinto-beans]

The television wasn't working when I walked into the waiting room of the cardiology office earlier this week. Minutes later, when it was fixed and showing minute-by-minute stock-market action, the collective pulse and blood pressure of the room picked up dramatically.
Seated to my left was George , who by Tuesday morning -- after watching the Dow Jones Industrial Average decline by more than 1,100 points during the two previous trading days -- was telling his wife that they needed to change fall travel plans to save money.
To my right was Ilene, who told her son that "a few more days of this and I will have to start cutting back."
Seriously? A few days of bad market action and they were ready to buckle down and reduce their spending?
So I asked George and Ilene how the market action -- undeniably ugly but not panic-inducing -- could hit home so quickly that they forced immediate changes.
Their answers were illuminating, largely because they showed a disconnect between gut instinct and portfolio, a zone where people let market gyrations affect them in ways that are unwarranted.
Moreover, George and Ilene are far from unique, as numbers from several big fund firms showed that investors weren't just checking account balances when the market was moving, but making protective moves.
At Fidelity Investments, according to spokesman Joseph Madden , call volumes peaked on Monday, August 24 , exceeding norms by nearly 50%. Conversations on the company's "Personal Investing Phone" lines were longer than normal, Madden said, "indicating that a majority of callers were seeking reassurance and discussion versus just balance checks and transactions.
"Those investors who had an investment plan reported feeling confident in their plans," he said, "while those investors who have put off creating a plan for retirement or other investing goals, were motivated to create plans."
At American Century Funds, officials reported that call volumes on August 24 were 45% higher than average. The percentage of clients redeeming shares was slightly below a typical day, according to company spokesman Laura Kouri , but exchanges -- where a shareholder moves at least some of their money from one fund in the family to another -- represented 13% of call volumes, or more than six times the norm.
We can leave it to market analysts to decide whether moves made during the current market duress represent good or bad timing. What we know for sure is that the action is the personification of what George and Ilene were talking about in the medical office, a knee-jerk response to the ticker (and I don't mean their hearts).
We all know that panic-driven moves are bad; another reminder is unnecessary (http://www.marketwatch.com/story/why-you-should-worry-and-be-happy-that-stocks-arent-a-sure-bet-2015-08-28). Equally unnecessary, however, is the actual moves my fellow heart patients were considering, as became clear to George and Ilene during our chat.
Both George and Ilene are in their 70s, own their homes free and clear, and have sufficient assets to feel like they should be set for life -- at least until they start envisioning a market implosion wiping out 30% or 40% of their net worth.
George and his wife Anne are in good health, planning to travel in the fall and to spend much of the winter down South with one of their children. Ilene, a widower, has had more severe health issues that are starting to limit her mobility; she lives in a retirement community and aside from a trip to see family around Thanksgiving and her holiday shopping, she has nothing planned outside of the ordinary, day-to-day expenses.
George explained his nervousness by noting that his oil stocks -- a key to his stock investments -- have been suffering for at least a year now, and that his mutual funds mostly have been flat in 2015, but that he now expects them to decline while the market sorts out its current woes.
"I've got to buy those plane tickets, and we eat out a lot when we're down with the kids, and how do you not plan to cut back when you have no idea what the market is going to do next?" he asked.
The answer for George , and others like him, is that you look at your investment portfolio based on income needs, rather than its total return. Those oil companies were purchased to provide a stable, solid yield, and the income has remained steady even as the stock prices have dropped 20% and more. If the dividends were cut -- rather than the stock price -- that might be reason for George to change his spending habits.
Likewise, George's other moves to build stability and safety have left him so that he's not appreciably shrinking his nest egg each year, despite saying that he spends "freely, at least when I want to."
Ilene said simply that the stock market made her worry about "running out of money."
When pushed to show how her spending habits were eating through her modest retirement plan, the annuity payments arranged by her late husband, and Social Security , Ilene conceded that she doesn't really think she is anywhere close to overspending.
Indeed, several studies have shown that retirees often spend much less per average day than they expect, way less than they can afford.
In round terms, the person who could afford based on their retirement income plan to spend $100 per day winds up spending $50 , yet feels that they have to cut back further "just to be safe."
Ultimately, both George and Ilene put themselves in that camp too, recognizing that they're sufficiently frugal that their occasional splurge doesn't reduce the chances that they will outlive their money, even in the face of a market correction.
That peace of mind is the result of good planning; it's why Fidelity officials saw nervous investors clamoring for a plan now, when the heat of the moment may be too late for some.
A good look at the real impact of market spikes -- and whether they affect day-to-day income projections -- should be enough to convince most people that what's happening now isn't coming close to worst-case prospects. Once you have that assurance, it becomes a lot easier to slow your breathing and check your pulse at a time when the market could otherwise send it racing.
- Chuck Jaffe ; 415-439-6400; [e-mail]
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(END) Dow Jones Newswires
08-28-15 1613ET