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What They Believed

Jonathan Clements

I MOVED FROM LONDON to New York in 1986. For the next three-plus years, I worked as a lowly reporter (read: fact checker) and then staff writer at Forbes magazine, before I was hired away by The Wall Street Journal. During those three years, I set out to educate myself on U.S.-style personal finance.

Forbes was a great place to do that. The magazine’s Greenwich Village offices had a well-stocked library of financial books and company reports, plus all kinds of periodicals circulating through the editorial department. Equally important, the pace of work was slow enough that there was time to take it all in. Other reporters would quip that working at Forbes was as good as getting an MBA, and I think they might have been right.

What did I learn at Forbes? I got a handle not just on personal finance basics, but also on prevailing attitudes toward managing money. Here are six financial opinions that were then widespread—but have since fallen by the wayside:

1. Plenty of active managers beat the market, and it’s easy to identify them ahead of time.

By the late 1980s, there were already numerous studies that undercut this belief—including one published as long ago as 1932—and yet it was still widely embraced. Indeed, it wasn’t until the early 2000s that a broad swath of the investing public started abandoning actively managed funds in favor of index-mutual funds and especially exchange-traded index funds.

It’s been a wise move, as evidenced by S&P Dow Jones Indices’ ongoing study of actively managed funds. For instance, among the nine U.S. style boxes, the best performing actively managed funds over the past 20 years have been large-cap value funds—and, even in that category, an astonishing 83% of funds have failed to beat the category’s benchmark index.

2. Financial advisors’ role is to help investors buy products.

That product might be a stock, a mutual fund or a variable annuity. The advisor’s role was to call occasionally with investment ideas and—if you bit—he or she would get a commission.

What about the conflict of interest—the distinct possibility that the advice was driven less by your financial needs and more by the advisor’s hunger for another commission? What about looking at your overall portfolio and pondering whether your investments collectively made sense? What about other financial issues, like estate planning, taxes, when to claim Social Security, insurance and—perhaps most important—figuring out whether you’re saving enough to meet your goals? Put it this way: There’s a reason commission-charging brokers have become dinosaurs and fee-only financial planners have seen their business boom.

3. Some investments are worth paying up for.

How about a mutual fund with an 8.5% load? Or a variable annuity with total annual expenses equal to 3% or more of assets? Or a hedge fund that takes 2% of clients’ assets each year and 20% of all gains? Back in the late 1980s, such costs were considered acceptable by many. In fact, I remember brokers arguing that load funds were inherently superior to no-load funds, that they generated better returns and that the load created an incentive for the fund manager to outperform the market. I kid you not.

A digression: During the 1990s, I wrote about the inferior results earned by load fund investors. Within days, a delegation of Merrill Lynch executives was dispatched to the Journal’s offices to complain bitterly about my story and to share data that purportedly debunked it. As the meeting ended and we were filing out of the conference room, Paul Steiger—then the Journal’s managing editor—gave me a surreptitious smile and whispered, “They didn’t lay a glove on you.”

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Today, few investors are nonchalant about costs—and, indeed, rock-bottom fees have become a major selling point for fund companies and brokerage firms. That doesn’t mean costs are no longer something we need to worry about. Yes, horrendously high commissions and expense ratios are less common. But investors still face less obvious costs, such as the bid-ask spread on individual stocks and bonds, high fees for separately managed accounts and miserably low yields on the cash accounts offered by many financial firms.

4. Stocks don’t stay at elevated valuations for long.

In the late 1980s and into the 1990s, many investors, scarred by the U.S. stock market’s wretched returns between 1966 and 1982, fretted as price-earnings ratios climbed and fully expected the market’s multiple to fall back to its long-run historical average. But instead, in the three decades that have followed, there have been few moments when stocks have been objectively cheap.

There are all kinds of reasons for this, including lower interest rates making stocks more attractive, falling investment costs, a growing appetite for risk, and a market dominated by technology stocks that look expensive based on standard market yardsticks. The upshot: Relatively rich valuations don’t necessarily foretell lousy performance in the months and years ahead.

5. The dream is to retire early to a life of endless leisure.

Early retirement, of course, is still the goal for many folks. But what’s changed is our conception of what constitutes a good retirement. Today, many retirees believe that, to have a fulfilling retirement, they need to engage in activities that bring a sense of purpose to their final decades.

I’m certainly in that camp—in part because I saw how my father handled his own retirement. He retired in his mid-50s and, a few years later, moved to Key West, Florida, where he knew almost nobody. Key West might seem like paradise to some, and I imagine that’s where my father thought he was headed. But instead, I fear his final 15 years were somewhat lonely and aimless, and that he wasn’t all that happy.

6. Social Security should be claimed as soon as you retire.

I didn’t spend much time studying Social Security until the late 1990s—which, by itself, tells you how little discussion there was of Social Security claiming strategies at the time. Indeed, when I finally started digging into the topic, I can still recall the dearth of available information.

Today, by contrast, the question of whether to delay Social Security, and thereby ensure both a larger benefit during your lifetime and a potentially larger survivor benefit for your spouse, is considered perhaps the most important decision facing retirees. But in the late 1990s, it was barely debated, and instead the prevailing assumption was that you should claim as soon as you quit the workforce. Want to make a more considered decision? A great place to start is the calculator built by Mike Piper of ObliviousInvestor.com.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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macropundit
macropundit
1 month ago

>> 4. Stocks don’t stay at elevated valuations for long.

Ah yes, the “return to the mean”? Michael Mauboussin and others have written about how few people –even among prize winning economists– know what mean regression actually is. I don’t know what it is off the cuff, but I know what it’s not. And it’s not what financial advisors almost invariably claim or imply. IMO that is the correlate or enabler of #4.

Great piece that was a fun read.

David Hoecker
David Hoecker
1 month ago

Regarding point 3, paying fund loads. I went all no-load funds in the late 80s/ early 90s, before ETFs. Still have several of those no-load funds. In the ought’s and 2010s have used only ETFs for new money. Do load funds even exist anymore — can’t imagine how they can still make that business model work.

John Daniels
John Daniels
1 month ago

Ah, the memories of all those cold calls from NY brokerage firms!

i am older than you, Jonathan, and I remember the “unfixing” of commission rates and the entry on the scene of Charles Schwab. It was common for “full service” brokers to say that lower commissions were a bad idea, and that I would get better trade executions and save money if I continued to pay high commissions.

David Hoecker
David Hoecker
1 month ago
Reply to  John Daniels

Ah yes — cold calls. I remember back in the 80s getting the “3-phase” call. I actually read about this in WSJ at the time. The first call is for the caller to introduce himself. Second call is to ask how my investments are doing. Third call is to push the caller’s recommendation. I would get these calls at work, well before caller-ID, so would always answer my phone. Then as soon as I realized who it was, hang up.

Jonathan Clements
Admin
Jonathan Clements
1 month ago
Reply to  John Daniels

Yes, they’d say anything to keep the gravy flowing.

SanLouisKid
SanLouisKid
1 month ago

I’m glad to see the evolution of investing to include:

• managing income and expenses
• tax planning
• insurance planning
• estate planning
• retirement planning 
• investment planning

For a while what you got from a “financial planner” was a stock or investment suggestion that generated commission.

I worked for a large “financial planning” company in the early 2000s and was amazed that the solution for many client’s situation was a high commission variable annuity.

I’ve been looking for an hourly fee financial planner in the area I live. They are hard to come by. I had a friend who was an hourly fee planner and he went to work for an assets under management company (1% of account balance). He said, “I’ve got a family to feed.”

Financial success is not a matter of genius. It’s a matter of having the right habits.
Warren Buffett

Last edited 1 month ago by SanLouisKid
Tooney
Tooney
1 month ago

Really enjoyed the story about Merrill Lynch vs. Clements. I bet this wasn’t the only time your writings brought complaints and pressure from the financial industry.

betsy larey
betsy larey
1 month ago

I wish I would have taken your advise when I sold my business in 2006. My private investment firm is pretty cheap ( .60 on the 1st M, .40 above that) but they have lagged the S and P over the last 10 yers by 3.5%. Here’s my question. My gains are substantial if I sold and dumped it all in an index fund. (Probably 250K). So at this point I feel like I’m stuck with this.
Your thoughts? Are there tax issues with year end distributions of index funds? Thanks and I’ve learned more by reading humble dollar than anything else I’ve read

Randy Dobkin
Randy Dobkin
1 month ago
Reply to  betsy larey

You can start by not buying more of your current investments (not reinvesting dividend and capital gains distributions).

Andrew Forsythe
Andrew Forsythe
1 month ago
Reply to  betsy larey

You might also find helpful this article by Adam Grossman: Adding the Minuses – HumbleDollar I’ve used it to help me decide whether to sell some higher expense mutual funds I bought many years ago and which have accumulated substantial capital gains.

Jonathan Clements
Admin
Jonathan Clements
1 month ago
Reply to  betsy larey

With broad stock market index funds, especially the ETF variety, capital-gains distributions are rare but you will receive income distributions. In terms of selling and swapping to index funds, there are so many factors to consider that it’s impossible to give a quick, universally applicable answer. This might be a time when buying an hour of an accountant’s or financial planner’s time would be a worthwhile investment.

Chazooo
Chazooo
1 month ago

At one time, fresh out of the Ivy league, breaking into the stockbroker world of hallowed Greenwich must have been a wonderful experience, full of promise and sugarplum fairies dancing in one’s head…if not arriving too late to make the ship.

Ormode
Ormode
1 month ago

So what will they be saying in 2052? Oh, those dumb investors back in 2022, they thought……

Jo Bo
Jo Bo
1 month ago

Great list of things that seem obviously wrong in hindsight. My personal favorite — from the 1990’s, just prior to the dot com bust — was that we lived in a “new economy” where old investing paradigms such as dividend yields no longer applied. At the time, that led me to question my instincts, but luckily, not to quash them.

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