Where did our financial stability go?

But the variability of that family's income has also increased. In the early 1970s, annual income in any one year swung in a range of plus or minus $9,546. In other words, a bad year might turn that $56,375 into 17% less, or $46,829. By the mid-2000s, the range of that annual swing had climbed to plus or minus $17,692. A bad year in those later years could turn that larger income of $69,406 into $51,714. That's potentially 25% less in any one year.

The increase in variability hasn't been limited to just one part of the income pyramid. For families in the 10th percentile, those who make more than only 10% of all U.S. families, income variability started the period at plus or minus 30% and climbed to almost 50% by the mid-2000s. In any one year, the income of a family in this bracket could deviate by 50% up or down from its average.

For families in the 90th percentile, who earn more than 90% of U.S. families, income variability climbed from a swing of 16% up or down ($16,860 in the 1970s) to one of 28% up or down ($43,000 in the 2000s). In dollar terms, that's a potentially disastrous difference.

Choices brought us here

As Gosselin writes, "Stop for a moment and imagine what would happen to your life right now if your annual income plunged by $43,000. Even if it eventually rebounded -- and not all do -- could you keep up your car and mortgage payments, continue your kid's music lessons and keep children on the hockey team?"

No wonder we're worried.

The increase in income volatility that shows up in these numbers isn't an accident of the U.S. or global economy, Gosselin argues. As a society, we've pursued choices that have led to this increase in volatility. For example, we've replaced pensions that had guaranteed annual payouts with individual retirement accounts and 401(k)s, where the payout is determined by how much we save and how well our individual investment choices turn out. And we're increasingly replacing employer-provided health insurance with private policies that, when disaster strikes, provide little coverage or none at all.

Often these changes were justified by their proponents, Gosselin notes, as an attempt to lift the heavy hand of paternalistic government from our shoulders. Individual investors, it was argued, would invest their money more efficiently than corporate or government pension fund managers.

Gosselin, however, makes a convincing statistical case that the gains have been outpaced by the losses. We've gradually discovered, for example, that most people are terrible managers of their own retirement money. Most people, in this case, includes the more than 20 winners of the Nobel Prize in economics that Gosselin interviewed.

(My favorite is the admission by Harry Markowitz, who had laid the foundations of all Wall Street theories of how to build a safely diversified portfolio. When he was asked how he wanted his retirement money invested, he said 50% stocks, 50% bonds. "In retrospect," Markowitz told Gosselin, "I should have done something more sophisticated.")

The best-laid plans

If the statistics don't bring you around to Gosselin's conclusions, his vivid anecdotes about how this system can devastate the lives of people who have planned intelligently and soberly to take care of themselves should at least make you think about the system we've built:

• There's the story of a woman who was denied cancer treatment because her insurance company claimed she hadn't disclosed her illness when it wrote her policy -- even though the woman's medical records from her oncologist were in the insurer's files all along.

• There's the story of a couple who discovered the insurance policy that "guaranteed" to pay replacement cost if their house burned would cover only half the cost of rebuilding.

• There's the story of the man who lost $150,000 when his 401(k) plan ignored his instructions to sell -- and who then found out that federal law denied him any right to sue to recover his losses.

All these stories are about people who tried to follow the rules. They weren't deadbeats. Or stupid. Or wasteful. Many of the people who Gosselin profiles were insurance agents, company vice presidents and accountants. They thought they understood the game, and they thought they had plans in place to protect themselves from the worst consequences of the accidents that life deals out so randomly.

We're anxious because the lazy, the greedy and the slothful don't show up among Gosselin's stories of financial train wrecks. We're anxious because these people are like us, perhaps indeed more farsighted and resourceful than we are, and still they lost. That's what's scary.

Because if it can happen to them, despite their planning and foresight, it can happen to any one of us.

Updates to Jubak's Picks

Sell Joy Global (JOYG, news, msgs): I'm going to sell Joy Global out of Jubak's Picks with this column and buy Gorman-Rupp (GRC, news, msgs) as a way to cut the risk in my portfolio at a time when stocks are looking vulnerable to another move downward while retaining my exposure to the boom in global infrastructure.

The price-to-earnings ratio on Joy Global has climbed to 31.2 times trailing 12-month earnings. That's high at a time when the Standard & Poor's 500 Index ($INX) is trading at 19.5 times earnings. A P/E ratio like that makes a stock vulnerable, especially in a nervous market, to a big dip on any miss in quarterly earnings. And Joy Global isn't exactly a paragon of earnings predictability: The company has missed Wall Street consensus estimates in three of the past five quarters.

As of June 24, I'm selling these shares out of Jubak's Picks with a 46% gain since I added them to the portfolio Oct. 30. (Full disclosure: I will sell my personal position in Joy Global three days after this column is posted.)

Buy Gorman-Rupp: By switching into Gorman-Rupp and out of Joy Global, I'm staying long infrastructure but trading into pumps and out of mining equipment.

Gorman-Rupp reported earnings of 43 cents a share for the first quarter of 2008, a 43% increase from the first quarter of 2007. Gross margins climbed to 24%, well above the five-year average gross margin of 21.3%. Fueled by growth in international sales of its pumps and pump controls for use in the oil, agriculture, fire prevention, construction and industrial sectors, the company's order backlog grew to $116 million, about 1.5 times quarterly sales, at the end of the first quarter.

International sales account for almost 30% of total sales. With Wall Street projecting 2008 earnings growth of 27.5%, this stock offers high growth at a bargain P/E ratio of 23.6 times trailing 12-month earnings.

As of June 24, I'm adding these shares to Jubak's Picks with a target price of $49 a share by March 2009. (Full disclosure: I will add shares of Gorman-Rupp to my personal portfolio three days after this column is posted.)

Developments on a past column

"Inflation from Asia: The next crisis": Inflation numbers took a huge jump in India in early June. Announced June 2, the wholesale price index, the country's key inflation measure, jumped to 11% for the week ending June 7. That's the highest rate of inflation since February 1995.

The Mumbai Stock Exchange's 30-stock Sensex index fell 3.4% on the day of the inflation announcement on fears that the Indian Reserve Bank would have to raise interest rates from an already high 8%. The Indian stock market finished the day down 28% for 2008 and now trades at prices last seen in August 2007. Despite the drop in 2008, the Indian market is still up 55% from the beginning of 2006.

Editor's note: Jim Jubak, the Web's most-read investing writer, posts a new Jubak's Journal every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions on helping navigate the treacherous interest-rate environment, see Jubak's portfolio of Dividend Stocks for Income Investors. For picks with a truly long-term perspective, see Jubak's 50 Best Stocks in the World or Future Fantastic 50 Portfolio. E-mail Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares in the following companies mentioned in this column: Joy Global. He does not own short positions in any company mentioned in this column.

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