Devoted to understanding the basics and fundamentals of investing

Larry, I want to retire in 10 years, should I sell my equity exposure now?  What if there is another 9/11, will we go through another 5 years with no net return?  I received a phone call from my friend Craig S. asking these questions.  He had just been shown an Equity Indexed Annuity.  Craig liked the downside protection and was not too worried about the upside cap.  We agreed to meet and talk about risk tolerance and asset allocation.  He also agreed not to buy anything until then.

Craig and I had talked together five years ago.  We went over his asset allocation.  He was long on fixed income and under weight on stocks.  We talked about the purpose of stocks in a balanced portfolio to give some inflation protection.  I also told Craig that there had only been a few times in the last 100 years when on a rolling 5 year period stocks were not the best returning asset class.  Craig decided to allocate some of his cash and buy an S&P 500 Spyder ETF.  It did very well for six months and then 9/11 happened with the subsequent recession.  Craig's still not quite at breakeven almost 5 years later.

In hind sight Craig would have been better off leaving his money where it was.  But, he did avoid the temptation to sell at the bottom of the market and lock in his losses.  He has recovered almost his entire principal and should do so shortly. 

So what is the correct advice to give to Craig?  That depends on his new appreciation for volatility in the stock market.  I still feel exposure to the stock market is warranted as an inflation hedge.  But there are other options such as Treasury Inflation Protected Securities he can use.  The returns are not as good, but you can sleep at night.  Craig otherwise has a very balanced portfolio and should be able to meet his retirement goals.  We will talk, and he will decide.  I'll let you know.