The stock market of 2008 is shaping up to be just such a "severe" event-one that has shattered the retirement plans of many investors.
"Planners comfort themselves by appealing to the long run," Bodie says. "But the long run becomes the short run when you're about to retire."
Bodie feels retirement planners should focus on managing risk with Treasury Inflation-Protected Securities (TIPS) and I-Bonds, which provide a guaranteed payoff on maturity. If he were an advisor, Bodie says that's where he would be telling his clients to put the remainder of their retirement money. If clients insist on stock exposure, he says, it should be through S&P 500 call options.
Critics say the return on TIPS and I-Bonds is too low to be a realistic option for most individual investors. TIPS, for example, were bringing negative yields for part of 2008.
Bodie, however, argues that the inflation protection guarantee is the key to these products. As for the low yields, he says that's the trade-off between risk and reward-and the reason he can sleep peacefully at night.
"When you shift into safe assets, as I have done, you give up the thrill of victory and the agony of defeat," says Bodie, who turned 65 in 2008. "Right now, I'm sitting at my computer looking up sailing vacations in the Caribbean. The fact that the market has gone down almost 50% from its high in 2007 doesn't bother me. I chose not to be part of that."