Letters to the editor: Student says avoid hysteria

Note: This editorial is in response to an April 1 editorial by Brandon Holcomb titled “Personal Accounts Make No Cents to Social Security.”

Editor:

Brandon Holcomb is apparently on the E-mail list for one of the countless liberal pressure groups out to kill Social Security reform, as his latest editorial is largely a rehash of their stale talking points. ?Editorial writers are free to offer any opinion they wish, but openly exhorting readers to call members of Congress on legislation has no place in any work of journalism. ?Not even The New York Times goes that far. ?At any rate, not much of his argument stands up to factual challenge, so, here goes.

I am in the investment industry myself. ?Holcomb’s opening anecdote of how the mutual funds earmarked for his college savings performed during the recent market crash is a common story. ?If the account was opened when he was a “small child” I’m assuming age five or so it was given a roughly fourteen-year time horizon. ?It is definitely a performance outlier to have lost two-thirds of the total value accumulated over ten years in a three-year bear market, even if the mutual fund was entirely based in aggressive stocks. ?But all this suggests to me is that the account was not properly diversified. ?For important planning like education or retirement, it is common practice to steadily move portions of one’s investment out of stock-based assets and into bonds and cash. ?

By making some assumptions on start and finish years, and by substituting an evolving mix of stocks, bonds and cash instead of a completely stock-based mutual fund, I prepared a hypothetical for how Holcomb’s account, properly allocated, would have performed: had it started in 1988 with $10,000, average annual growth of over 14 percent would have yielded over $60,000 by the end of 2001, enough for a GCSU education several times over.

This is not simply a case of hindsight guiding me to the result that supports my position. ?On the contrary, this hypothetical began de-emphasizing stocks before the investment got to the late 1990s when stocks posted their best returns. ?By simply following established investment theory, switching to bonds and cash as the investment approaches the date it will need to be accessed; potential losses from stocks are kept to a minimum. ?

A changing asset mix of this sort is a virtual certainty in any personal accounts proposal that would be enacted for Social Security. ?The President’s favored model is fashioned on the Thrift Savings Plan for federal employees, something nearly every single member of Congress participates in. ?It would be composed of ultra-low cost index funds and would not allow individuals to chase speculative stocks or other asset classes in the years approaching retirement. ?There is not a single 20, 30, or 40 year period in the past century that a diversified portfolio of this sort hasn’t crushed the miserable sub-two percent returns offered by Social Security. ?And what’s more, every single politician that is currently out there bragging about what a gamble personal accounts are knows this.

The Bush proposal is not perfect, and Holcomb correctly observes that it doesn’t directly address Social Security’s solvency problem. ?Neither will burying our heads in the sand and pretending there is some bottomless pit of money out there that can provide us a painless fix. ?Form your opinion on it with facts and not the hysteria and propaganda of groups who have a vested interest in getting you dependent on government at a very early age.

Shawn Mercer
MBA Student

Posted by Colonnade Archives on Apr 15 2005. Filed under Letters to the Editor. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry