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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.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X (Twitter) @ClementsMoney and on Facebook, and check out his earlier articles.
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Here’s a quaint idea that needs to be brought back: High School Home Economics class. Maybe change the name to something more contemporary, but the amount of kids who know nothing about balancing a checkbook, loans, savings, investing, stocks, bonds, etc. is staggering.
We need to educate about the value of steady retirement income stream (s) and to make their creation easier. As mentioned by tshort below, an annuity option needs to be part of DC plans. I would favor using employer contributions to gradually accumulate an annuity payout available in retirement.
Man, I hope not. If we’re lucky we’ll still be alive “decades from now” with a hopefully still-intact investment portfolio continuing to surprise us with its ability to support us for so long and so well without depleting itself.
So what changes in long-term investment thinking might arise between now and, say, 2050, that would cause us to look back at the 2020s and think, “how quaint”?
I’d look for sea-change improvements in the following:
I don’t know – maybe these are just my wishlist of things I’m hoping will transpire over the coming years, rather than things I truly believe will occur.
We shall see.
I hope your sea-change improvements such as low-cost (or employer subsidized) annuity options and AI-guided tontines come to pass, although will probably be too late for me, since I’m researching SPIAs and TIPS ladders right now.
Great list — thanks for sharing it.
Wow, what thoughtful writing. Jonathan sign this person up immediately as a regular contributor. You won’t even have to edit his writing!
Nice article posing great questions as always with great answers.
Jonathan, You covered a lot of ground with this article. I am fascinated by the Lake Wobegon “principle” from Garrison Keillor via Wikipedia: The characterization that “all the women are strong, all the men are good-looking, and all the children are above average” has been used to describe a real and pervasive human tendency to overestimate one’s achievements and capabilities in relation to others.
I’m as guilty as anyone of this but knowing that helps me avoid it a little.
Nice article Jonathan. I think HD does a great service by demonstrating that financial planning is far more than investment management.
Thank you for hosting this community Jonathon. I am a news junkie but this is the first thing I read on Wednesday and Saturday mornings. I look forward to the writers’ insights into investing and retirement.
Me too!😊
Great reflections on our progress, Jonathan. My wife and I regularly talk about how accessible good financial information is to very unsophisticated people like us, and of the desire we have to spread the word. We’re very thankful. I still like paper maps, though.
A most emphatic agreement on paper maps. In many decades of hiking, I have dropped many paper maps – and never broke even one. Also, the batteries on them have never failed.
A highly thoughtful article about covering all the bases in a lifetime in a high tech world Jonathan. A lifetime that goes by at breakneck speed.
Thank you.
My old boss once said, “Life is an eternity looking forward. A flash looking back.” He might have gotten that from someone else but I’ve never been able to track down another source, so I always give him credit.