Every day, people come into our office and ask what we recommend they do with their investments. It’s a difficult question to answer, as my crystal ball is on the fritz. The conversation will usually go something like this.

Me: “How are you feeling about your investments right now?”

Client: “Happy about my balance, but really nervous about the future.”

Me: “If you are so nervous, why not pull some money out and take some profits?”

Client: “But what if it goes up more?”

Me: “What if it does?”

Client: “Then I miss my chance to have even more.”

Me: “What if it goes down?”

Client: “That’s my dilemma!”

There is a whole lot to unpack here. First, the conversation uncovers the key issue involved in helping retirees and those getting ready to retire: The fact that we have been taught that risking our life savings is a “normal” thing to do. But is it?

Back in 1980, before the 401(k) and other defined contribution plans began to emerge, there were approximately 20 million stockholders in U.S. markets. By the year 2000, that number had increased to more than 100 million. In 1980, there was approximately $1.5 trillion invested. By 2000, that had gone to well over $7.5 trillion. Today, more than $16 trillion is invested in retirement accounts alone. Back in 1980, there were 564 open-ended mutual funds with about $134 billion invested in them. Twenty years later, that had grown to more than 8,000 funds, with nearly $7 trillion invested.

In other words, the markets we invest in and the risk we take is all quite new. It has all materialized since 1980, which was the beginning of the birth of the 401(k). Much of the growth in the market was actually caused by the move from defined benefits plans to defined-contribution plans as employers woke up to the fact that they could save trillions of dollars, and the mutual fund industry realized it could capture those dollars.

At about the same time, the final nail was pounded into the coffin of the Glass Steagall Banking Act, which is comprised of four provisions of the United States Banking Act of 1933, separating commercial and investment banking. In commercial banking, you lend the bank your money and it, in turn, lends it to businesses for inventory and operations, auto loans, home mortgages, personal loans, etc. It is very stable, and your money is, for the most part, quite safe. These are the loans driving returns for things like CDs and other conservative savings deposits.

Investment banking, on the other hand, is quite risky. This is where IPOs (Initial Public Offerings), venture capital, and private equity all live. These investments are highly speculative, risky, and though they have the potential to pay off big, investors can lose a lot as well. This banking is equally as risky as actually being in the market, and the risk is often masked by the fact that your one-time exclusively commercial bank may now have a large percentage of assets in these very risky portfolios.

It’s so risky, in fact, that it took barely seven years from the end of Glass Steagall, which had worked brilliantly for nearly 70 years, for the banking industry to nearly collapse during the meltdown of 2007. Many trillions of dollars moved from people’s retirement accounts into the accounts of the big Wall Street investment houses holding short positions in banks. The movie, “The Great Short,” covers all of this brilliantly.

So, not only was bearing all this risk in retirement assets not a thing before 1980, it was the shift that largely caused the huge runups in the market which were then quickly brought down by people who were betting against the boom. And that’s where you want to keep your retirement future? And now the market is even higher.

Warrant Buffett’s favorite metric is something called the Buffett Indicator, which is the ratio of the total market cap (TMC) to the U.S. gross domestic product (GDP). Of this ratio, Buffett says, is “probably the best single measure of where valuations stand at any given moment.” In many ways, it’s a global look at the price to earnings ratio (PE) that is the go-to measurement for the value of an individual stock or fund.

The data used in this ratio has only been available since about 1950, so this is relatively new. If you look at it, you will notice that since then, it has only been over 100 three times since 1950. Those peaks hit in 2000, when it sat at 161%, in 2007 when it reached nearly 120%, and now, since about 2013. Currently it sits at about 144%. In other words, Warren Buffett’s favorite indicator is screaming, “get out now.”

Yet the market just keeps on rolling forward with no apparent end in sight. So how to determine what to do? My advice is to begin asking some questions.

The first is, if all your money were currently in cash, would you be inclined to keep it there, or to move whatever amount you currently have in the market. If you believe you would not buy at the moment, you should probably not hold, either, as the risk is the same.

The second is, if you were to gain 20% or 30% in the next six months, would that greatly impact your retirement lifestyle. For most people, the answer is no. Now, flip it around. If you were to lose that same 20% to 30% in the next six months, how would that impact your retirement. Most people say quite a bit.

The good news is that we have the ability to actually measure these limits. We can show you, with precise accuracy, how much you would feel comfortably losing in order to receive certain gains. Then, we can analyze your portfolio and determine if it is within your risk tolerance.

These tests are accurate for about 95% of cases. Only “black swans,” like 2000 and 2007, cannot be measured. You know, the things predicted by the Buffett Indicator, which is currently predicting one. Maybe the big one. Maybe it’s time to take more control?

Stephen Kelley is a recognized leader in retirement income planning. Located in Nashua, he services Greater Boston and the New England areas. He is author of five books, including “Tell Me When You’re Going to Die,” which deals with the problem unknown lifespans create for retirement planning. It and his other books are available on Amazon.com. He can be heard every weekend on “The Free Money Guys Radio Hour” on WCAP and WFEA, and he conducts planning workshops at his New England Adult Learning Center, located in Nashua. Initial consultations are always free. You can reach Steve at 603-881-8811 or at www.FreeToRetireRadio.com.

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