Whether markets are efficient or inefficient, the result is always the same: After costs, most investors trail the market averages.
TAKING CARE of aging loved ones is almost always difficult. You’re worried about them and want them to be comfortable and happy. But they’re also concerned about you and what you’ll have to deal with after their death—settling their estate, funeral costs and the hassles involved.
As my grandmother approached the end of her life, we asked questions that I was initially afraid to ask. But it was the right thing to do: Answering those questions relieved stress for both my grandmother and my entire family.
WE’RE FASCINATED by the recent college admissions scandal—and the wealthy parents and celebrities who were arrested. This drama has all the elements of a reality television show. The parents, who get starring roles as villains with no moral compass, scheme to ensure their children gain admission to sought-after colleges.
The lively plot doesn’t bother with common concerns, such as how to afford the high cost of college tuition, which continues to rise much faster than inflation.
THIS MONTH saw the publication of a remarkable biography: The Man Who Solved the Market chronicles the life and career of hedge fund manager James Simons. Over the past 31 years, Simons’s Medallion Fund has clocked average returns of 66% per year. Even after Medallion’s fees—which are the highest in the industry—investors took home average returns of 39% a year.
By way of comparison, the U.S. stock market historically has returned about 10% a year.
WHEN WE THINK about portfolio building, we tend to think first about stocks. They’re our engine of investment growth—and the source of endless anxiety. Indeed, to make stock market investing palatable, we take all kinds of precautionary measures, including diversifying broadly, adding bonds, throwing in cash, purchasing gold and goodness knows what else.
But maybe we have this all wrong. Perhaps, instead, we should start with cash: how much we currently have in safe,
A WRITER RECENTLY asked my opinion of gig economy jobs and how they could benefit retirees looking for extra income. I looked up the term to be sure my understanding was correct. It was—except we used to call the jobs “temporaries,” “part-time,” “project work” or “consulting.” As I told the writer, a gig economy job sounds pretty good for us retirees who want to keep active or supplement our income, especially if it doesn’t involve being a crossing guard.
IT BAFFLES ME that people often favor stock-picking over index funds—and yet they fail to measure their portfolio’s performance against a proper benchmark. I’m not talking about those who buy a few individual stocks for entertainment or education. For them, it’s a worthwhile pastime and the stakes are low.
But there are others who ignore the evidence and arguments against active management, and devote serious money to picking stocks and timing the market in hopes they’ll earn market-beating returns.
IF WE WON’T SAVE for the future, should somebody do it for us? Everyone knows Americans don’t save; last year, we managed a miserable 3.4% of personal disposable income. That’s not going to cut it for either financial emergencies or retirement.
We can’t even get many workers to save sufficiently to obtain an employer match in their 401(k) plan. That’s free money left on the table. According to separate calculations by Alight Solutions and Fidelity Investments, one out of five workers don’t invest enough to get their employer’s full matching contribution. What can they be thinking? How are they spending? My view: Except for those living in poverty, everyone can afford to save. What they can’t afford is a lot of their spending.
With the problem well-recognized and no solution in sight, perhaps it’s time to go in another direction—a controversial one, I’ll admit. Should we force more savings and, in the process, ensure that all Americans have a better stream of retirement income? One vehicle that’ll do that—here’s the controversial part—is Social Security.
First, we need to get our act together and ensure the current program remains solvent. “To illustrate the magnitude of the 75-year actuarial deficit, consider that for the... Trust Funds to remain fully solvent throughout the 75-year projection period… revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.76 percentage points to 15.16 percent.” That’s from the 2017 Social Security Trustees Report. The current rate is 12.4%. This shortfall can be fixed in many ways, but let’s take a leap of faith and assume it is indeed fixed.
Next, we turn to increasing retirement income. If we need 15.16% of payroll to keep what we have, we need something more for additional benefits. Let’s say we add another 3% for employers and 3% for workers, for a total Social Security payroll tax of around 21%. In theory, that could boost the ultimate benefit by perhaps 40%. Even if employers lowered 401(k) matches as a result, many workers would be ahead of the game.
And as long as we’re in the realm of the controversial, let’s invest that new money in the stock market, rather than Treasury bonds paying barely 3%, as is now the case. Yikes, partial privatization.
None of this precludes the need for individual savings, but it does ensure every worker saves something. It also boosts the retirement incomes for those less responsible. Heck, maybe that 3% should be 5%.
These concepts are not new. But every time they or similar ones are raised, there’s political controversy and nothing happens. Every government action to date to boost saving for retirement has met with mediocre success, in large because of individual behavior. Remember myRA?
Like it or not, right or wrong, we can’t cut Social Security unless we somehow transform the average American’s often-irresponsible financial behavior. What to do? My contention: If people can’t fix their own financial future—and it seems many can’t—
perhaps we, as a society, need to fix the problem for them, by expanding Social Security and making everybody contribute more.
A HEALTHY 65-year-old couple can expect to spend an average $369,000, figured in today’s dollars, on health care over their remaining lifetime, calculates Milliman. At age 67, those costs will devour 39% of their pretax Social Security benefit.
NO. 79: PAYING ZERO taxes is a terrible waste. If you lose your job, or you just retired and aren’t yet tapping your retirement accounts or collecting Social Security, you may have a year with little or no taxable income. To take advantage of your low tax bracket, consider realizing capital gains in your taxable account or converting part of your traditional IRA to a Roth.
ELIMINATE duplication. Many folks have multiple bank and brokerage accounts, multiple funds that invest in the same market sector and even multiple advisors. This can make sense if, say, the goal is to increase FDIC insurance. But often it reflects naïve diversification—the idea that more accounts mean greater safety. Our advice: Simplify—for your sake and that of your heirs.
FRAMING. How choices are presented to us can influence how we decide. For instance, we might opt to buy stocks if we’re told there’s a 75% chance of making money each year—but avoid them if we’re told there’s a 25% risk of loss. Similarly, we’re more likely to contribute to the 401(k) if joining is the default choice, rather than an option we need to select.
TAKING CARE of aging loved ones is almost always difficult. You’re worried about them and want them to be comfortable and happy. But they’re also concerned about you and what you’ll have to deal with after their death—settling their estate, funeral costs and the hassles involved.
As my grandmother approached the end of her life, we asked questions that I was initially afraid to ask. But it was the right thing to do: Answering those questions relieved stress for both my grandmother and my entire family.
WE’RE FASCINATED by the recent college admissions scandal—and the wealthy parents and celebrities who were arrested. This drama has all the elements of a reality television show. The parents, who get starring roles as villains with no moral compass, scheme to ensure their children gain admission to sought-after colleges.
The lively plot doesn’t bother with common concerns, such as how to afford the high cost of college tuition, which continues to rise much faster than inflation.
THIS MONTH saw the publication of a remarkable biography: The Man Who Solved the Market chronicles the life and career of hedge fund manager James Simons. Over the past 31 years, Simons’s Medallion Fund has clocked average returns of 66% per year. Even after Medallion’s fees—which are the highest in the industry—investors took home average returns of 39% a year.
By way of comparison, the U.S. stock market historically has returned about 10% a year.
WHEN WE THINK about portfolio building, we tend to think first about stocks. They’re our engine of investment growth—and the source of endless anxiety. Indeed, to make stock market investing palatable, we take all kinds of precautionary measures, including diversifying broadly, adding bonds, throwing in cash, purchasing gold and goodness knows what else.
But maybe we have this all wrong. Perhaps, instead, we should start with cash: how much we currently have in safe,
A WRITER RECENTLY asked my opinion of gig economy jobs and how they could benefit retirees looking for extra income. I looked up the term to be sure my understanding was correct. It was—except we used to call the jobs “temporaries,” “part-time,” “project work” or “consulting.” As I told the writer, a gig economy job sounds pretty good for us retirees who want to keep active or supplement our income, especially if it doesn’t involve being a crossing guard.
IT BAFFLES ME that people often favor stock-picking over index funds—and yet they fail to measure their portfolio’s performance against a proper benchmark. I’m not talking about those who buy a few individual stocks for entertainment or education. For them, it’s a worthwhile pastime and the stakes are low.
But there are others who ignore the evidence and arguments against active management, and devote serious money to picking stocks and timing the market in hopes they’ll earn market-beating returns.
A HEALTHY 65-year-old couple can expect to spend an average $369,000, figured in today’s dollars, on health care over their remaining lifetime, calculates Milliman. At age 67, those costs will devour 39% of their pretax Social Security benefit.
NO. 5: WE CAN’T stop misfortune from befalling us—but we can limit the fallout by keeping emergency money, living below our means, taking on debt cautiously and buying the right insurance.
ELIMINATE duplication. Many folks have multiple bank and brokerage accounts, multiple funds that invest in the same market sector and even multiple advisors. This can make sense if, say, the goal is to increase FDIC insurance. But often it reflects naïve diversification—the idea that more accounts mean greater safety. Our advice: Simplify—for your sake and that of your heirs.
NO. 79: PAYING ZERO taxes is a terrible waste. If you lose your job, or you just retired and aren’t yet tapping your retirement accounts or collecting Social Security, you may have a year with little or no taxable income. To take advantage of your low tax bracket, consider realizing capital gains in your taxable account or converting part of your traditional IRA to a Roth.
FRAMING. How choices are presented to us can influence how we decide. For instance, we might opt to buy stocks if we’re told there’s a 75% chance of making money each year—but avoid them if we’re told there’s a 25% risk of loss. Similarly, we’re more likely to contribute to the 401(k) if joining is the default choice, rather than an option we need to select.
IF WE WON’T SAVE for the future, should somebody do it for us? Everyone knows Americans don’t save; last year, we managed a miserable 3.4% of personal disposable income. That’s not going to cut it for either financial emergencies or retirement.
We can’t even get many workers to save sufficiently to obtain an employer match in their 401(k) plan. That’s free money left on the table. According to separate calculations by Alight Solutions and Fidelity Investments, one out of five workers don’t invest enough to get their employer’s full matching contribution. What can they be thinking? How are they spending? My view: Except for those living in poverty, everyone can afford to save. What they can’t afford is a lot of their spending.
With the problem well-recognized and no solution in sight, perhaps it’s time to go in another direction—a controversial one, I’ll admit. Should we force more savings and, in the process, ensure that all Americans have a better stream of retirement income? One vehicle that’ll do that—here’s the controversial part—is Social Security.
First, we need to get our act together and ensure the current program remains solvent. “To illustrate the magnitude of the 75-year actuarial deficit, consider that for the... Trust Funds to remain fully solvent throughout the 75-year projection period… revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.76 percentage points to 15.16 percent.” That’s from the 2017 Social Security Trustees Report. The current rate is 12.4%. This shortfall can be fixed in many ways, but let’s take a leap of faith and assume it is indeed fixed.
Next, we turn to increasing retirement income. If we need 15.16% of payroll to keep what we have, we need something more for additional benefits. Let’s say we add another 3% for employers and 3% for workers, for a total Social Security payroll tax of around 21%. In theory, that could boost the ultimate benefit by perhaps 40%. Even if employers lowered 401(k) matches as a result, many workers would be ahead of the game.
And as long as we’re in the realm of the controversial, let’s invest that new money in the stock market, rather than Treasury bonds paying barely 3%, as is now the case. Yikes, partial privatization.
None of this precludes the need for individual savings, but it does ensure every worker saves something. It also boosts the retirement incomes for those less responsible. Heck, maybe that 3% should be 5%.
These concepts are not new. But every time they or similar ones are raised, there’s political controversy and nothing happens. Every government action to date to boost saving for retirement has met with mediocre success, in large because of individual behavior. Remember myRA?
Like it or not, right or wrong, we can’t cut Social Security unless we somehow transform the average American’s often-irresponsible financial behavior. What to do? My contention: If people can’t fix their own financial future—and it seems many can’t—perhaps we, as a society, need to fix the problem for them, by expanding Social Security and making everybody contribute more.