What Americans need: An 'idiot-proof' retirement system

Volatility in the stock market over the last couple of weeks has caused enormous unease among investors big and small. Tens of millions of people with much of their retirement money in the market are worried about seeing a sudden plunge in prices. Many of these people will sell their stock to protect themselves from further losses, which demonstrates the basic problem with making retirement income dependent on an unstable, unpredictable exchange.

The story is that people tend to make bad decisions when they manage their money in the stock market. They are likely to sell at a low point after the market has just taken a big tumble, as has happened in the last two weeks. Then they buy back in during a run-up, paying much more than if they'd just held on to their stock.

It's natural to want to "stop the bleeding," no matter what professionals advise. As a result, people who actively manage their money typically get considerably lower returns than people who just buy and hold their stock. And this is before counting the brokerage fees and other costs associated with trading.

This pattern is important to keep in mind in the context of proposals to privatize Social Security, which may find their way back into political debate, as several Republican presidential candidates seem to think privatization is a good idea. A decade ago, President George W. Bush tried to privatize Social Security, but he abandoned the effort without ever putting a bill before Congress. In Washington, however, no bad idea stays dead for long, so we may have to argue once again over the future of Social Security.

http://www.latimes.com/opinion/op-ed/la-oe-0828-baker-stock-market-retirement-20150828-story.html#navtype=outfit