PROGRESS IN RECENT decades has been remarkable. We no longer do math using slide rules, talk on phones attached to walls, choose from just a handful of TV channels or drive clutching an unfolded map.
Less obvious—but arguably just as important—has been the progress in our financial thinking. Looking back over the post-World War II period, I see five key phases in our thinking about money, and those phases roughly parallel the needs and wants of the baby boomers, as they went from amassing money for retirement to spending down those savings. Ever heard the five statements below? You’re far less likely to hear them today:
“I just buy the best investments I can.” Today, everyday investors are quick to talk about their portfolio and how it’s allocated—and yet the very notion of portfolio design is a relatively new one. Until Harry Markowitz’s groundbreaking work in the 1950s, investors were focused not on building diversified portfolios, but on buying the best investments, however they chose to define “best.”
Today, by contrast, many investors can rattle off key portfolio statistics, such as their split between stocks and bonds, U.S. and foreign shares, large and small companies, and growth and value. Until the 1980s, this sort of style-box talk would have been rare, even among sophisticated investors.
“I can beat the market if I put in the work.” To me, it isn’t clear there was ever a golden age when savvy professional investors cleaned up at the expense of supposedly foolish amateurs. And if there was such a period, I suspect any performance edge among professional investors resulted not from hard work and brilliant research, but rather because they had greater access to inside information.
Indeed, evidence that professional investors were struggling to beat the market has been available since at least 1932. That was the year that Alfred Cowles detailed the poor performance of professional money managers’ stock picks and market forecasts.
More than four decades later, the problem posed by this poor performance was finally solved, thanks to Vanguard Group founder John Bogle, who in 1976 opened the first index fund for everyday investors. Instead of regularly lagging behind the market indexes by one or two percentage points a year, investors could now mirror the market’s return, and today they can do so while incurring annual expenses of less than 0.1%, equal to just $1 a year for every $1,000 invested.
“My broker picks stocks for me.” The work of Cowles, Markowitz and others got financial advisors to think more carefully about portfolio design and investment selection. But the world soon moved on—and today the best advisors no longer focus solely on investing.
The fact is, it’s awfully hard to outperform a simple portfolio of low-cost, broad market index funds. By contrast, with a little effort, we can substantially improve our financial lives if we focus on issues such as saving diligently, managing taxes, spending thoughtfully, managing debt, planning our estate, purchasing necessary insurance, buying the right size home, claiming Social Security at an appropriate age, and avoiding behavioral mistakes. A greater awareness of these issues has been a boon for everyday investors.
Indeed, if you use an advisor and he or she doesn’t help with anything other than your portfolio, it’s time to get a new advisor. What if you manage your own money? If you devote endless hours to your investments and very little to these other issues, you’re almost certainly shortchanging yourself.
“I’ll be happier when I get that next pay raise.” Folks have always sought to lead happier, more meaningful lives. But the amount of research devoted to the issue—especially the connection between money and happiness—has soared in recent decades. The resulting insights have quickly gone mainstream, perhaps reflecting our growing post-World War II affluence, with money available to satisfy more than just basic human needs like shelter, food and clothing.
Do you favor experiences over possessions, try to keep your commute short, take time to express gratitude, endeavor to have a robust network of friends and family, and use your money to buy yourself more free time? Whether you know it or not, there’s a good chance you’ve been guided by academic research.
“I’m looking forward to having more time to relax.” Are you retired or nearing retirement? As you ponder how to handle your finances and how to use your free time, you’ve likely been influenced by the new thinking of the past few decades.
For instance, concern about sequence-of-return risk—an outgrowth of Monte Carlo analysis—has made folks leerier of bad financial markets during their initial retirement years. Worries about longevity risk, and analysis of the best Social Security claiming strategies, have led more folks to postpone claiming benefits. Discussions of happiness, and how retirees with predictable income tend to be more content, have also led folks not only to delay Social Security, but also to see the value in pensions and income annuities.
Meanwhile, a better understanding of what makes for a fulfilling life has prompted folks to view retirement less as a chance to relax, and more as a time to take on new challenges. It’s also led folks to think more about how they’ll avoid social isolation during their retirement years.
All five topics above are a focus here at HumbleDollar, but especially retirement. And we’re hardly alone. Driven by the aging of the baby boomers, I suspect we’ll see growing interest in retirement issues among both academics and the media—and the result will be ever-more valuable insights. Indeed, folks may look back decades from now and view today’s thinking about retirement as backward and perhaps even wrongheaded.