Investors on the chopping block

            The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned.

So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8% plunge in the Dow on October 29, 1929. In today’s markets, a 12 % plunge doesn’t feel like a big deal but back then it was substantial and it didn’t stop there. The market went on to lose 90% of its value and usher in the Great Depression.

Then there was the stock market crash of October 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world.  Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly.

And how could we forget October, 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500’s eighty year history. We registered the most down days in a single month since 1973.

Actually, despite these gruesome statistics, October historically turns out to be the seventh-best month to own stocks, tied with April, putting it in the middle of the pack.

September, on the other hand, is the bad boy of the calendar year. It holds the record for most miserable month as far back as 1929. If we look even further back in history we discover the root cause of September’s stock market underperformance.

Back in the day, much of 19^th Century American commerce consisted of East Coast purchases of newly harvested crops from the South and Midwest regions for sale to the rest of the country. September was harvest month so bankers and other investors would borrow large sums of money from Wall Street, temporarily pushing up interest rates while redirecting money flows away from stocks and into the bond market.  This would also coincidentally push down prices in the stock market that month.

Although money flows have long since been regulated by the Federal Reserve for events like the planting season, the tradition of down Septembers persist. Since 1959, the S&P 500 Index has declined an average of 0.9% in September. In the first two years of a presidential term the performance is a bit worse. Overall, investors have suffered the most double digit losses in that month as well.

In today’s world. other concerns might explain September’s continued poor performances. There is the ‘back to work’ phenomenon, which occurs just after the Labor Day holiday. Many investors typically take the summer off and when they come back are disappointed to find that their portfolios gained little during the summer months. They lose patience and sell.

One reason for that disappointment may be that a company’s earnings for the year have not met the expectations of the market. The normal end of June, early July, quarterly earnings announcements often time disappoint. What may have seemed a reasonable expectation by company management at the end of the prior year may not be a reasonable estimate by mid-year for a variety of reasons. The company’s stock price may decline or simply mark time temporarily. Many investors won’t want to hang around for yet another earnings disappointment at the end of September, so they sell ahead of earnings season.

This year, September has certainly lived up to its reputation with the averages declining almost 5% overall while volatility has skyrocketed. The bottom line is that if September is usually the month when crashes occur, then October is the month that ends them. Since September is over, the good news is that we have weathered the worst and if history is any guide, the future should be a bit better.

“SPY –a perfect symmetrical triangle on the one minute.”

“Obama jobs report baked in. I’m short until tomorrow’s real report then we get a fluff rally.”

The above comments were lifted from a daily internet trading service peopled by day traders and other speculators. There are hundreds of them. Their comments make little or no sense to most readers, nor should they. Yet, in order to compete in today’s stock markets as an individual investor, this kind of investing behavior is required. Is it any wonder that individual investors are abandoning the stock market in droves as the reality of how the markets have changed hits home?

Even before the so-called ‘flash crash’ on May 6, 2010, the retail investor was, at best, risk adverse when it came to the stock market. Burnt badly in 2008 when individuals lost as much as $20 trillion of their net worth, retail investors continued to withdraw money from stocks in 2009, despite a 69% rally in the stock market. By late spring of 2010 that trend had just begun to reverse. Investors channeled $13 billion into U.S. mutual funds in March and almost $7 billion in early April. I started to get excited and mentioned it in my columns. But by the third week in May, the retail crowd sold almost $30 billion in stock funds and is once again on the sidelines. What happened?

The debt problems in Greece, which have since spread to the rest of Europe, are partially to blame. Skittish investors who have yet to make back the money they lost over the last two years, are afraid the global economic environment may slip into a double dip recession. That could send the markets into another death spiral.

At the same time, new revelations of wrong doing within the financial sector during and after the 2008 financial crisis has exposed the blatant manipulation and collusion among some of the biggest names in the financial business. It also turns out that Bernie Madoff was just the tip of the iceberg as allegations of fraud, pay offs and insider trading are implicating one financial big cat after another, including at least one close to the Obama Administration.

But it was the ‘flash crash’ that brought it all home to the little people.

“I had some hope that the stock market was still a somewhat level playing field,” said one client shortly after the crash, “but when I saw markets drop in a blink of the eye, I finally realized I could lose years of savings in a matter of minutes.”

It is common knowledge that high-frequency computer trading (HF trading) using complicated, instantaneous algorithms comprises 70% or more of all trading in stock markets (although the firms involved constitute only 2% of trading firms). Flash trading is a subset of HF trading that allows certain financial exchange customers to see incoming orders to buy and sell securities before the general market participants, typically 30 milliseconds in exchange for a fee. Bottom line: Wall Street insiders get the inside track as to where the market is heading.

How can that be, you say? Because there is a dark underbelly hidden behind those crisp white shirts and button down vests of certain Wall Street types. There are things called ‘dark pools’ dating back to the beginning of the decade. These are unregulated private or alternative trading systems that allow its members to transact business without displaying prices and quotes publically. Orders to buy and sell are anonymously matched and not reported to anyone, even the regulators.

What this means is that there is a whole other market beyond the prices and quotes you see running along the bottom of that CNBC television screen. None of us, not even what is called the ‘Smart Money’ and certainly not the retail investor, has any clue how much and at what price stocks are trading in this parallel market. I suspect that dark pools may have had a hand in last month’s ‘flash crash’.

Given the dwindling participation of individuals in the markets, volume throughout the last year has steadily decreased. Those who remain are largely short –term, minute by minute traders using computer driven proprietary soft ware programs to scalp a penny or two per share regardless of whether or not they are buying or selling a viable company or a dog. They have the markets largely to themselves.

That’s why the lion’s share of gains in U.S. markets is accomplished before the markets even open here. That’s why you can almost count on a major up or down move in the markets in the last half hour of trading each day. If allowed to continue, the only players left in the markets will be the manipulators and won’t that be fun watching them sabotage each other.

The truly deep market declines (like the one we are now experiencing) make calling a market bottom unnecessary. In my experience, whenever any stock market has dropped by over 50%, I begin to invest. I figure I can’t go wrong with a “half off sale” even if prices decline by another couple of percent. To my way of thinking, I’m still getting a deal especially if I plan to hold my investment for the next few years.

That’s not to say you should put all your cash to work immediately. Instead, I suggest you use a time- tested method of investing called dollar cost averaging. It works this way: let’s say you have $12,000 to invest, take the first third of that sum ($4,000) and buy your stock or mutual fund this month. Add another third in January and the final third in February. This type of investing works well especially in volatile markets and usually produces the best entry level prices. If you are super cautious invest one third every three months.
Stock valuation is also a better way of buying stocks then trying to pick a bottom. I use the price/earnings ratio (among others) as a measure of determining how cheap stocks really are. Last month the S&P 500 benchmark index traded at roughly 10.4 times earnings which is the lowest it’s been in over 50 years. Could stocks go even lower? Sure, they could but they are cheaper now then at any time since I came into the business.

Another factor that has always been present in severe market corrections is an overwhelming mood of pessimism and fear among investors. Over the last two months I could practically scrape anxiety off my office walls. I have experienced an unrelenting torrent of sell orders with practically no client willing to add money to the market. I witnessed the same thing dozens of times and learned to buy when others sell.

As for the market pundits and talking heads you watch on television, ignore them. I have lost count of the number of market pros this year who have called a bottom on this market not once, not twice but three times! I’m sure even more will jump into the act every time stocks make another move higher. If they keep proclaiming a bottom, they are bound to be right at some point.

At their lows in November the S&P 500 was down 52% and the Dow lost 47%. They can go lower if history is any guide. I remember the Japanese market in the aftermath of the bursting of their real estate bubble back in the 1990s. The Nikkei fell much further than 50% as did our own tech-laden NASDAQ market in 2003. Then there was the crash of 1929-1930 when the Dow fell by about 48%, retraced 50% of the decline and then fell almost 90% in 1930. Yes, that was an exceptional period but it certainly could happen again. So don’t put all your chips in the market at once. Dollar cost average and have patience. Over time you will be rewarded.

My first beef with the theory comes down to this: what is long term for one investor may not be for another. If you are 75 years old, long term may mean a period of time far shorter than someone celebrating her twenty-first birthday. If you are saving for your four-year-old son’s college education your time horizon is far different than for a daughter who is fifteen.

Another issue is timing. Say you are 67 and retiring this year. You remained fully invested throughout this crisis and have now lost 50% of the savings you have been accumulating over the last 25 years. It would be a safe guess to say that for you a buy and hold strategy has been an unmitigated disaster!

Much of what we know about modern day investment theory stems from the findings of Harry Markowitz, an academician, who in 1952 developed the Efficient Market Hypothesis. He argued that a stock, bond or portfolio was considered efficient if no other asset or portfolio of assets offered a higher return for the same or lower level of risk. He believed that most markets were so efficient that the current market prices of securities reflected all information (public or private) available to investors. In its strongest form, this theory stated that it is pointless to try and achieve superior portfolio performance. The Buy and Hold strategy of investing is an off-shoot of this theory.

Let’s look at some historical results of a B&H strategy. If you had invested $1,000 in the S&P 500 index at the 840 level in 1997 you would have made nothing over the last 11 years following a B&H approach. Overseas it is even worse. Take Japan, for example, the Nikkei average is at the same level it was in 1981, the year I went to work on Wall Street. Honk Kong is where it was 14 years ago while France Germany and Italy are back to where they were over a decade ago.

The Buy and Hold crowd argues that based on your age and risk tolerance level a well diversified portfolio will do just fine over the next 25 years. They point to studies conducted in 1979 as proof. My problem is that the studies assume the next 25 years will be the same as the last 25. It won’t be. A huge number of baby boomers, for example, are retiring in the immediate future. Medicare and social security costs will be drastically higher. We are engaged in two wars. Who believes government spending will be the same as it was in prior years? I could go on but you get the point.

Besides, how has that well-diversified portfolio held up this year? It seems to me that with the exception of treasury bonds and cash everything has gone down the tubes in this sell-off. The theory’s defenders will argue that this market correction is an abnormality, something we will not see again in our lifetimes. That may be true but I think they said the same thing in 2002-2003 during the dot.com bust.

Regardless of who is right, I believe that by the end of this downturn there will be far fewer adherents to a philosophy that has produced little or no gains for most Americans over the last decade.

Unfortunately, TA is not an exact science and I am by no means an expert in understanding all those diagonal lines and geometric figures of chartists. For me, it boils down to this: a stock (or any other security) once in motion, tends to stay in motion. Most often, I use TA in combination with fundamental analysis and price momentum. It helps me identify trends within financial instruments whether stocks, bonds, markets, currencies, or commodities.

Many prominent scientists decry technical analysis as Voodoo and with terms like “head and shoulders”, “neckline” and “pennant formation”, I can almost see their point. . I remember sitting in my MBA classes at NYU listening to my learned professors drum the same message over and over in my head. They claimed, according to this Efficient Market Hypothesis, that markets are so efficient that all available information is already discounted in stock prices and that an individual stock’s future behavior is random or at best, a guess. Some argued that even insider information is fully discounted in price action. Intuitively, after 28 years working in financial markets, I find that hard to believe.

Take the last year and a half as an example. In 2007, we had a lot of volatility and three significant corrections. By the end of the year the S&P 500 had only gained 3.5%. Yet, at times during the year, the market was substantially higher before finally peaking at a new all-time record in October. Since then the markets have only increased in volatility. By Christmas, it wasn’t difficult to figure out that the economy was slowing, sub-prime problems were increasing and a looming credit crunch was upon us. Everyone knew or at least suspected that. The question was how bad would it get and how much had been already discounted in the markets?

Fundamental analysis couldn’t answer that question because there wasn’t enough data out there, which was the worse of all situations. You see, most investors can usually absorb and discount information rapidly whether good or bad, but what they can’t abide is not knowing. My momentum indicators certainly told me the market was heading lower (and then higher) depending on the most recent news but it was technical analysis that gave me sign posts along the way. Was it perfect, heck no, but it was better than staring down into a great big black abyss and wringing my hands.

As 2008 approached and the unknown loomed larger, I expect an increasing number of investors, both professionals and traders, began to look at technical supports, resistance, and pivot points. Like me, they began to trade or invest according to those indicators. This creates a domino effect. The more people are acting in concert to buy or sell a stock, a market, the dollar, gold, silver or oil, the more the outcome will be as expected. But don’t take my word for it. In my next column we will hear from one of the most important technical analysts on Wall Street today. He will tell us how he does it and may even give us his view of the markets in the months ahead. Stay tuned.

Social investing in this country has been around since the Quakers first forbid their members from buying and selling slaves. John Wesley, one of the founders of the Methodist Church, also preached on the pious use of money. Modern SRI began when investors shunned Dow Chemical (among other companies) as a protest against the use of napalm and profiteering during the Vietnam War. Since then nuclear power, auto pollution and a host of other causes have galvanized the movement.

By some estimates there are now between 1 and 2 million Americans who, in varying degrees, attempt to steer clear of “sin” stocks. A partial list of targeted areas would include: tobacco, gambling, alcohol, defense, environmental, human rights, labor, abortion and animal rights. That might not sound like much but if you count institutional investors, like pension funds and other corporate activists, the total investment in SRI exceeds $2.7 trillion dollars or 11% of the $25 trillion in total assets under management in the U.S. today. That means that nearly one out of every nine dollars is invested today with an idea of righting some wrong whether in Darfour, Zimbabwe or anywhere in between.

The largest pool of such money, about $171 billion, resides in the 173 different SRI mutual and exchange traded funds including $12 billion in variable annuity products. There are also three closed-end funds and 46 alternative investment vehicles that hawk the latest in “going green”. So how have they really performed this year?

It just so happens that I have a few clients who have asked me to invest them in some SRI funds. At Dion, we use several exchange traded funds (ETFs) from time to time that also qualify as “green” funds. Two mutual funds, I have used Pax World Balanced (+ 0.5%) and New Alternatives (-2.5%) were purchased in early September of last year and are down less than 3% while Guinness Atkinson, an alternative energy fund, is down about 6% from the October 2007 market peak. There are also two SRI screened ETFs: KLD and DSI. These securities shadow the Domini 400 Social Index, which is a socially-screened index of market cap- weighted common stocks. This index is off 82 cents for the year % which is out performing doing better then its cousin, the S&P 500.

There are other exchange traded funds that attempt to replicate alternative energy that are much more volatile, for example, Powershares Cleantech was down as much as 19% but has recovered to a -2% loss for the year. Power Shares Water Resources after falling more than 9%, is now showing a 1.6% gain year-to-date. WilderHill Clean Energy has lost a whopping 19.28% year-to-date. Obviously some funds can offer investors a wild ride. Buyers beware, much of any individual SRI fund’s performance depends on the fund manager just like any mutual fund.

“Alternative energy funds have had a bigger correction,” agrees Doug Wheat, a Florence, Ma. fee-only financial planner with some SRI clients. Doug worked for the SRI World Group, an information provider on socially responsibility and corporate responsibility before starting his own business.

He believes there is a shift afoot among SRI managers. In the past managers screened and selected companies based on what they didn’t invest in like tobacco or alcohol.

“Today there is a trend toward sustainability investing,” Wheat says,” firms are shifting from a negative to a more positive, forward-looking approach.’

He says managers are screening for companies that take an aggressive, pro-active approach toward good corporate citizenry. Now, experienced pros feel they have an inside track on how company managements perform in this area and can use that knowledge to invest in the winners and avoid the losers.

Finally, among this generation’s SRI investors priorities and concerns have changed. Alcohol and gambling, for example, have taken a backseat to global warming, carbon pollution and human rights. The point to remember is that there is an up and coming next SRI generation. More and more people and institutions are investing with their heart as well as their pocket book. Thanks to them the flowers will still be around this summer and hopefully for many more summers to come.

An avid sports fan, you can usually find this dark-haired Bronxville, N.Y. native striding through his firm’s cavernous trading floor talking to traders about stocks and markets. His customers, a vast array of money managers and other institutional investors throughout the world, manage trillions of dollars for clients like you and me. Back in the day, when he first took a stand on gold and oil, he recalled, his opinion was met with disdain, even contempt.

“We were aggressive believers in gold and gold stocks in October, 2001. Gold had bottomed and begun to move higher. I met tremendous disagreement with that call. Institutional investors demanded a reason why gold and then energy were moving up but there was no inflation, no financial crisis, and no currency problems. I didn’t understand it myself. The only thing I knew was it was changing direction.”

John, who has been analyzing markets for 15 years, admits it is really difficult to look at a chart and see what is going on with a stock. His desk is stacked with charts sandwiched between books on economics, finance, baseball and sports legends.

“If someone can identify which direction a security is going in a chart then that goes a long way in characterizing a stock or any security,” he admits, but he uses more than technical analysis in his work.

“The components I look at besides technical analysis are market sentiment, bonds, interest rates, currencies, commodities and what I call news response syndrome,” he explained. “How does a news item impact the security or the market? Does bad news cause a security to go up or down? This gives me clues but it is not enough by itself.”

In his work Roque maintains a balance sheet of positive and negative assets analyzing all his components before making a decision on a particular investment. Most of all he tries to discover long term trends which contradicts the oft-cited criticism that technical analysis demands a short term, trading mentality.

“That’s a misnomer,’ he argues, “and tech guys do themselves a disservice by being perceived in that way. Guys that concentrate on trends do a better job over the long term. I’m not a trader.”

He believes the toughest part of his work is to be cognizant of a developing trend and not to listen to detractors spouting conventional wisdom. “We almost always get taken out of our game, like a good player who is booed by the crowd to the point he starts to believe the ridicule. In baseball it’s called acquiring rabbit ears.”

Roque’s ears, last I looked, were still normal sized under a shock of thick black hair so it would be fair to say that he is an exception to that rule. I asked him what his views of the markets are now and in the months ahead.

“During the last big correction in 2003 it took the S&P 500 nine months to recover. We tested that bottom three times in July, October and a final retest in March of 2003. It wouldn’t surprise me that this correction continued through the summer months.”

Roque believes basic materials, energy and natural resources will lead the markets out of this correction and higher both here and overseas. Ultimately, he believes energy will be a bigger weighting in the S&P then financials.

“I go through a ton of charts on a weekly basis and I keep coming up with great mid-cap energy stock charts. The big guys don’t see them because their market cap are too small for them but over time most of them will grow into large cap stocks and then they will buy them.”

As for commodities in general, he believe they are in a corrective phase. “These kinds of corrections can be sharp and debilitating. They shake you to your bones and end up shaking you right out of your position.”

But long term he thinks they are under owned compared to 15 years ago when all the big research houses on Wall Street had commodity departments and institutional investors regularly invested in commodity stocks .

“As prices rise I think more and more professional investors will be forced to throw in the towel and start investing in these markets.”

Sectors of the market he would avoid are healthcare which has underperformed and financials.

“A lot of people believe financials are going to be the leadership group going forward but I disagree. In my opinion, stocks that make ten year lows do not lead the market higher. Once broken, a group takes many years to recover. They will be poor performers for some time to come.”

He is also not a big fan of bonds right now and expects long term interest rates to move higher in the near future as well as the dollar. Roque believes inflation is a real threat which is part of his bullish case for commodities in general. He predicts the Producer Price Index may well top 9% before all is said and done.

“If history is any guide, inflation is going higher and only Wall Street strategists, economists and Fed Board Governors think otherwise.”

My own experience in foreign markets dates back to 1982. Back then there were only a handful of American investors willing to dip their big toes into markets like Europe or Japan. I would traipse around the world with twenty or so highly doubtful American money managers in tow visiting “exotic” places like the South of France and Melbourne, Australia. As time went bye more and more managers, attracted by the promise of greater returns, took the plunge. By 1989, most institutions had some exposure to overseas markets. By then I was already kicking tires and talking shop with companies in Brazil, Eastern Europe and that once, Evil Empire, Russia.

I maintain that every investor should allocate at least 20-25% of their overall portfolio to foreign stocks and/or bonds. Many conservative managers disagree. They say foreign markets are too risky for that largely because the American-based investor has to get two things right: the markets and the currencies. They also point out that differences in securities law, accounting and even political systems make foreign markets unpredictable and volatile. In my opinion that’s a load of B.S.

Granted the historical drop in the dollar over the last few years has benefited overseas investments and when the dollar declines the value of your foreign stock or bond goes up. Yes, given the low levels of the dollar right now, there is more than an even chance that the next move of the greenback is up. That might temper your gains but by no means quell the case for investing overseas.

As for the rest of the arguments, ask yourself what country precipitated the sub-prime crisis? The facts are that many of the laws, regulations and political bodies of foreign countries now equal or in many cases provide greater protection to all investors, including Americans.

The United States now represents about 25% of the world’s stock market capitalization and that number continues to decline. At the same time, we ranked 57 out of 60 of the highest priced markets in the world. As of last week, the NASDAQ and S&P 500 ranked one and three in global price/earnings ratios, which is a valuation investors use to compare stocks and markets. While this year some of the higher-priced emerging markets like China and India have experienced 30-40% declines from their peak.

Developing economies now account for 35% of global GDP and their share will continue to grow at an ever-increasing rate. One reason is the wage differential: developed economies like the U.S. and Europe’s wage rate is about $20/hour while the remaining 80% of the world is only $5.00/hour. It’s hard to compete with that. Then there is the awakening demand of billions of overseas consumers who for the first time in history are able to contemplate the purchase of things likes automobiles, education and even housing. Think of America at the beginning of the Twentieth century and you’ll get the picture.

There are several ways to invest in foreign securities. The fact that most investors are not that familiar with foreign markets other than the one-off vacation they may have taken in Italy or Hong Kong, it is better to let the professionals handle it. The easiest method is through mutual funds and exchange traded funds. Almost every fund family has several offerings ranging from large, multi- country type investments to emerging market and even country funds.

There are also American Depository Receipts or ADRs. These are negotiable instruments representing an ownership interest in the security of a non-U.S. publicly traded company. They trade just like stocks and are quoted in U.S. dollars and take the complexity out of foreign investment. Finally, many brokers now offer direct foreign investment in certain markets. Both Schwab and Fidelity, for example, have large international divisions who trade foreign stocks overnight in Asia and Europe for retail customers.

Finally, some experts contend that foreign markets over time are becoming less correlated with their U.S. counterpart and therefore offer greater diversification and less risk. Unfortunately, that theory has yet to be proven. Clearly, there are times when that occur and times, like in this year’s downdraft, when world markets are tightly correlated. To me, it’s simply a question of where can I garner the greatest long- term returns. For the foreseeable future, I’m betting on the 80% of the world that is playing catch-up. The markets I favor over the next ten years or so would be China, India, various Latin American countries like Brazil and Chile and Eastern European markets.

Consider my choices this year. My employer is offering to match me dollar for dollar on the first 3% of my paycheck I contribute and a further fifty cents per dollar on the next two percent of my income I put into the plan. Essentially, I’m being offered a raise for saving and yet I hesitate. Why would I turn down free money? Answer: because I can’t spend it right away, that’s why, and I have to put an equivalent amount away for what seems like a long time without touching it. Like so many other American workers, I tell myself I can’t afford it but maybe that’s not entirely true.

The maximum contribution this year for these tax-deferred contribution plans is $15,500 ($20,500 if you’re over fifty). Like an IRA, I will only pay ordinary income taxes on the money in my 401 (K) when I withdraw it at retirement. Any withdrawals prior to age 59 ½ are subject to a 10% penalty tax although there are some hardship exceptions. Unlike an IRA, automatic payroll deductions take money out of my pay before I even see it so I won’t be tempted to spend it.

So this year, before making my decision, I crunched some numbers. I immediately realized that the more money I put into my plan the less tax I’ll pay in 2008, which means my take home pay will go up. Let’s say you make $36,000 a year and pay 5 percent of that into your company’s retirement plan. You’ve just reduced your taxable income by $1,800. When tax time rolls around, you would use $32,200 as your starting point for computing the government’s annual cut and that means getting some “real” money out of this deal in the form of lower taxes.

I also found out that many plans allow you to dip into your savings in the event of a family emergency. Hardships like high unreimbursable medical expenses, educational fees and tuition, payments to prevent eviction or mortgage foreclosure and down payments on first time primary residences are allowed. Loans are another available option. You can actually borrow from yourself at a fixed rate and repay the loan with after tax payroll deductions. I compared that with the benefits of maintaining my taxable savings account yielding 4% in a local bank. No contest, my 401 (K) plan wins hands down especially when I consider the investment options.

Most plans offer a smorgasbord of investments, mostly mutual funds, which are professionally managed by portfolio managers. I can pick from a variety of stock, bond or money market funds that invest in thousands of companies, securities and other investment opportunities. In a savings account, I’m on my own and any gains I might make are immediately taxable as well.

Finally, I did a”what if” exercise. Assuming for a moment I was twenty-five again and making $40,000 a year. I contributed $10,000 a year to my 401(K) earning 10% annually. At age 65, there would be nearly $4,870,000 in my plan but if I put off participating by even five more years, that sum dropped to $2,990,000.

So here I am, pencil poised above the maximum contribution line on my 401 (K) application and still I hesitate. Sure, I recognize the benefits but how much can I really afford? And then I recalled a speech last year by the Chairman of the Federal Reserve before Congress. He warned that this nation was heading toward a retirement brick wall in social security benefits and he isn’t the first Fed chief to sound that alarm. I pictured myself with no Social Security, spending my golden years on welfare. Shuddering, I reconsidered my question. Maybe it isn’t how much I can afford to contribute but rather can I afford not to, given the state of the nation’s retirement dilemma?