The Retirement Gamble

Last night Frontline ran an important series that everyone should watch (link embedded below). I have discussed many of these exact issues in Juggling Dynamite and elsewhere over the past 10 years.

I agree with Jack Bogle’s basic premise that lower fees are best for client returns, and that most fund managers offer no valuable risk management for their fee because they are closet indexers that simply ride market cycles up and all the way down again. That said, there is a problem with Jack’s business case as well (he founded Vanguard funds who also only collect their fee when people remain passively invested in their funds). The problem is called a secular bear market; the one we have been grinding through for the past 13 years.

During secular bear markets, stock funds including Vanguard remain fully invested through all phases of each market cycle up and then down. In these products- even low fee ones–holders have earned negative returns since 2000. This is the case because unlike the 1980’s and 1990’s, where stocks went up for 17 years interspersed with relatively short, shallow bear markets that took back just a portion of the prior cyclical gains. In secular bear markets, recessions are longer and more frequently recurring, and the accompanying bear markets in stocks typically take back 100% of the prior cycle gains. This means that passive investors are left with the extremely unattractive result of heart-stopping volatility and “return-free risk” which I have written about many times.  In this environment it is not simply enough to pay less for the ride, you need some personal discipline or service that is focused solely on actively managing capital risk throughout a full market cycle with a dominant concern for the individual’s life cycle and individual time horizon.   Where risk of loss dramatically outweighs the probability of durable gains, individuals need some methodology of hedging the downside or moving capital out of equities in order to avoid the bulk of each bear market decline.  Without out such risk control rules, investors would do best to avoid participating in publicly traded asset markets at all during such climates.

The investment business is mostly populated by sales people who are paid not to manage risk for their clients, but rather to sell the clients risk and call it “advice”. The conflicts of interest are horrendous and as this documentary reveals, there is very little change afoot because the financial firms have largely captured the rule makers and regulators. But also, as I have discussed repeatedly over the years: clients frequently play a leading role in their own poor results. Many people don’t want to hear that they need to spend less and save more. They frequently don’t want to know that “Freedom 55” is completely unrealistic for most today given increased longevity and the current low rate, low yield environment. They want to believe that those promising them higher returns can work “magic”. They don’t want to follow math, or understand laws of probabilities or market cycles. Corporate and public pension sponsors have also not wanted to hear that their return assumptions in this type environment are ludicrous and that increased contributions and reduced benefits are the only way to keep pensions viable. And so those with capital repeatedly sign up with the firms and “advisers” who are the least honest and thoughtful in what they do and say.

One other factor about investment returns is frequently missed. Over the years, as a client-centric, fee only, fiduciary, absolute return, financial advisory and risk management service, our firm has helped hundreds of clients to devise realistic spending and saving plans, reduce fees and costs, pay off debt, and avoid capital losses by side-stepping a world full of bad investment products and timing over full market cycles. And this is not to even mention helping them to manage their own business plans and steer clear of harmful requests and advice from family, acquaintances and fraudsters alike. This has added literally incalculable benefits to the financial success and peace of mind of our clients over the years. These benefits are not included in the annual return reports that we send out, but I have personally seen the life-changing benefit that this has added to real families over full lifecycles. Today in particularly crazy and treacherous financial times, this experience keeps me humbly committed to challenging but critically important work.

Retirement is big business in America, but is the system costing workers and retirees more than what they’re getting in return, asks FRONTLINE. Here is a direct video link.

Watch The Retirement Gamble on PBS. See more from FRONTLINE.

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