DennisBeaverNovember 10, 2012 (Original publish date) • By Dennis Beaver

In 2008-2009, when the stock market crashed, so many people who were either close to or in retirement not only lost their shirt, but also their self-confidence, trust in their own decisions, respect from family members and a complete loss of faith in their financial advisor. Heart attacks increased significantly, especially among the elderly, as a Duke University study reported in late 2011.

“But just wait. If they jump back into the stock market, life for many of them — who lost over half of what they had accumulated over many years — could get much worse if we see even a mini-crash,” warns a Southern California stockbroker who we will simply call Mr. X, a veteran of 25 successful years with one of the nation’s largest investment houses.

He has a warning: “Many of these same people are now being frightened into getting back in, told that if they do not, they will not have enough money to live on.”

Mr. X isn’t selling a book which promises to save us all from disaster and does not claim to be prophet. Rather, he finds “mounting evidence of highly dangerous financial propaganda, aimed at those very people — crushed financially and emotionally by their earlier losses — the last ones who should ever dream of putting what they still have at risk back into the stock market.”

Not everyone needs to be in

“There are many people who should not be in the stock market — either by temperament and their inability to emotionally cope with loss — or who have no need to own stocks, which are never a sure thing, and always far from it,” X points out. “When you have sufficient income sources without stock dividends or stock appreciation, then you probably do not need equities.

This includes people who:

Live within their means and save;

Remain clear of unnecessary debt, especially from credit cards;

Do not treat their home like an ATM:

Own some type of income property, royalty, annuity or a small pension; and,

Will receive Social Security.

“You avoid the craziness — the fear — of making a mistake in not buying stocks again, by asking: Are my needs met, or will they be with what I already have in place? What can I lose by being at risk again in the market? What would that do to me emotionally, and in the eyes of my family?”

No duty to watch out for your money

X cautions us to be wary of ads which create an image of stockbrokers who place their customer’s financial interests first. That’s what a fiduciary does — places the client’s interest first. But, stockbrokers are not fiduciaries.

“Regardless of these comforting ads, a stockbroker has no legal duty to watch out for your money or act in your best financial interest, and certainly not to put you first. We sell investment products, and just like anyone in sales, it is because we want a commission,” he notes.

“We must not knowingly put you into something completely inappropriate, but until the law changes, a stockbroker has no fiduciary obligation to customers. So, unless it is very clear that you are suffering from some mental impairment and your decisions cannot be trusted, we will do what our customer instructs. That’s why adult children need to be aware of what mom and dad just might be getting into, if there are questions about judgment or self-control,” X suggests.

“Also, realize there is no requirement for us to call you and say, ‘Sell this stock!’ Some brokers will, but most are only too happy to sell you something and then almost vanish,” he stressed.

“Just talk with the people who rode the 2008 crash all the way down — losing in many cases well over half of their money — and worse yet, could have gotten out early, had their brokers just said, ‘Look, it’s bad, sell now, keep your profits in cash and wait to get in later.’ But that rarely happened.”

It’s more than just losing money

“Losing money in the stock market is often much more than just losing money. It can ruin your marriage. It can get you sued by your employees if you manage and lose their retirement money,” broker X underscores.

“Finally,” he points out, “Often investors have no idea of what the term ‘risk tolerance’ means to them. The answer is only revealed in a down market. If you have proven to yourself that you cannot accept risk then, you have already answered the question, ‘Should I again be in the market?’”

So, what are we to do? Annuities claim to protect our nest egg, provide money in the future and not be subject to loss in a stock market crash? But do they, and are they as safe as all the fancy ads claim? We’ll have the answers next week.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.