5 Reasons Our Aging Society Doesn't Mean Stock Market Doom

(from Larry Swedroe's Wise Investing blog at CBS's Moneywatch.com, 9/22/2010 - click here to link to the original post)

A significant part of my time at Buckingham Asset Management is spent calming investors down, assuring them that what they’re concerned about is nothing more than noise meant to grab your attention, but has no basis in reality. The following is a recent example.

After reading an article, a client asked: “If 43 percent of Americans working are going to retire in the next decade, what are they going to live on? Are they going to liquidate their holdings in the stock market and, at a minimum, shift more into bonds? Won’t this restrain market growth more than the historical levels?” Here are five reasons why this type of consternation was unwarranted.

Information Isn’t Wisdom
The first thing I pointed out was that the investor should not confuse information with wisdom (information you can use to produce above benchmark returns). It’s only unanticipated events that move markets, not those that are fully anticipated. Think of it this way: If you know something (like a large segment of the population is nearing retirement), it’s a virtual certainty that other investors also have this knowledge and have acted on it. Thus, the expected impact of equity sales by retirees should already be reflected in today’s prices. It’s only if the level of equity sales is greater than expected should there be a negative impact on future equity prices. And, it’s certainly possible that sales will be less than expected or that there will be an unexpected offsetting increase in demand for equities from other sources. If that’s true, all else equal, equity prices would increase.

Conventional Wisdom Is Often Wrong
A second point I raised was that often what one reads (even if it sounds logical and the arguments are persuasive) may still be wrong — as conventional wisdom often is. One of my favorite sayings is “It ain’t what a man doesn’t know that gets him in trouble, but what he knows for sure, but ain’t so.”

The conventional wisdom about the relationship between age and investment allocations is actually wrong. There’s no evidence that investors dramatically reduce equity exposure as they age. As Jim Davis of Dimensional Fund Advisors pointed out in a 2005 article, the evidence actually suggests that investors “accumulate equity positions during their years of greatest earning power and do not dramatically reduce those positions as they enter retirement.”

Will Everyone Retire as Expected?
I also pointed out that it’s certainly possible that people won’t retire as expected. They may decide to continue working. Many people are now working well into what was considered the retirement years. Extending working years reduces the need to draw on portfolio assets.

It’s Not Just About the United States
I next pointed out that the U.S. equity market isn’t solely dependent on U.S. investors. The rapid growth of sovereign wealth funds and rapidly increasing per capita GNP in developing markets could lead to increased demand for U.S. equities from non-U.S. investors. Thus, it’s quite possible that when a U.S. retiree sells, the buyer will be a young software engineer from India or China. Thus, even if U.S. retirees become large net sellers of equities, it doesn’t mean valuations will be negatively impacted. There might be offsetting increases in demand from other sources.

The Savings Rate Has Been Climbing
In the most recent decade, one of the biggest concerns of policy makers was the very low rate of savings in the U.S., as the rate was so low that it was in danger of dropping below zero. The financial crisis has caused investors to reevaluate their savings patterns. Today, the savings rate is around 6 percent. And in the 1980s, the savings rate was around 10 percent. A rising savings rate could translate into an increased demand for equities.

The bottom line is this: Because today’s market valuation is based on all that is knowable about the future, it’s likely that currently unforeseeable events will have a far greater impact on prices than anticipated demographic shifts. And because what we don’t know is by definition unforecastable, the biggest impact on equity markets will likely come from events that few (if any) even have on their radar screens.

Thus, you’re best served by ignoring market forecasts and focusing on what you can actually control:

- Your risk level
- How well you’re diversified (eliminating or minimizing the diversifiable risks
of single companies, sectors and countries)
- Your costs
- Your tax efficiency

And finally, the fact that future returns are likely to be impacted by events that are not forecastable is why investors have historically demanded a large premium for taking the risks of equities. It’s also why equities are risky no matter how long your investment horizon.

What Do We Do?

Some of us here were involved in an interesting presentation last week on left versus right-brained thinking. We learned that, as advisors, we tend to spend quite a bit of time on the left side of the brain, which is driven by logic, numbers and data. The right side of the brain, on the other hand, is the emotional side, where pictures get painted, goals are envisioned and, most importantly, where decisions get made. This got us thinking about how we define what we do and, more importantly, how we communicate this to our clients and those trusted advisors with whom we work.

Our ultimate goal as fiduciary advisors is to provide for our clients’ financial and emotional security through comprehensive financial planning and investment management. That statement means a lot to us and, in theory, does an excellent job of summing up what we do. That said, it is a fairly left-brained concept that does not always translate well. While it makes sense that most of our time with clients is spent on the left side of the brain, using data and other logic to set a path with our clients towards their goals, it is the right side of the brain where our clients imagine those goals.

So, with our admittedly left-brain leaning ways, can we paint a better picture of what we do?

What we do is aim to understand our clients’ life goals and help them build a plan. This plan provides a clear path to achieving those goals, leaving our clients free to live their lives as envisioned, knowing the financial components of those life goals are in the hands of someone they trust and know to always act in their best interests.

We will continue to be analytical and fairly left-brained when it comes to what we do, but will strive to communicate with the right brain in mind as well. We will continue to make recommendations on investments, insurance, retirement and estate planning, but do understand that these are merely tools our clients use to help their families, protect their lifestyles, achieve comfort in retirement and build some kind of legacy for the future.

We encourage our clients and trusted advisors who read this blog to help us in furthering this definition. What do you value in what we do? How do you perceive our role as it pertains to you or your clients’ goals? What do you expect from an advisor in general? Use the comment button below to start the conversation and thanks, as always, for taking the time to read the blog.

Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com

Necessary Losses

On August 24th my husband and I learned he has Stage III melanoma. Gregg is what some people might call a “health freak” who has exercised nearly every day of his life since grade school, ingests a diet of organic fruits and vegetables, and uses sunscreen religiously. He has done everything within his power to maintain a healthy body; but we have learned, along with many other things over the past few weeks, there are things you can’t control, and DNA is one of them.

My way of coping with bad news is to try to obtain as much information as possible about it, and then determine a plan to deal with it. Unfortunately, the more I read about Stage III melanoma, the more discouraged I became. So I turned to a book, Necessary Losses, by Judith Viorst, to help me cope. In her book, she discusses the many illusions, dependencies and impossible expectations that all of us have to give up in order to grow as individuals. As I read, I recognized that I have been stuck in an illusion she describes as “omnipotent guilt, which rests on the illusion of control – the illusion, for example, that we have absolute power over our loved ones’ well-being. And so, if they suffer or fail or fall ill, we have no doubt that we are to blame, that had we done it differently, or had done it better, we surely would have been able to prevent it.” I know I have felt this way many times. Ironically, this illusion is probably why I became a financial advisor, and why I take my relationships with my clients so personally. Making sure that all the clients of our firm remain emotionally and financially secure has always felt like my life-purpose, not a job.

I’m a CPA and Gregg is an engineer by training, so I am sure we will both be struggling with the issue of control as we deal with his cancer. But instead of being frustrated by the things we cannot control, we have decided to focus on those we can. We are learning about expert doctors and clinics in the field, making sure that Gregg is getting the best treatment possible, and continuing to help him stay healthy, so his body can fight it.

We are also focused on the positive. We are thankful for the gift of meeting each other when we were so young, being happily married for over 30 years and enjoying and appreciating each sweet day of life. I hope you remember to do the same.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

Labor Day Reflection

I have just finished reading Where Men Win Glory by John Krakauer and it is a story that stays with you. The book is about Pat Tillman, the NFL player who was killed by friendly fire in Afghanistan on April 22, 2004. The thing that struck me the most about Pat’s character is that he never chose the easy path and was always true to his values.

The picture most Americans have about Pat Tillman as a hero does not extend beyond the government propaganda about his life and death or video from ESPN. Pat was not your stereotypical professional athlete who seeks the largest possible paycheck in exchange for his services. He was an example of the power of determination and demonstrated that mental attitude can drive your physical abilities to their outer limits.

After being told that his size would make it difficult to play high school football, Pat’s tenacity and outstanding play at Arizona State led to him being drafted in the 7th round in the 1998 draft by the Phoenix Cardinals. While with the Cardinals he was never was paid more than the league minimum. In 2000, his talents led to the offer of a five year $9.6 million contract with the Super Bowl Champion St. Louis Rams. He turned the offer down to stay in Phoenix with the team who had believed in him and earned $512,000 that year.

After watching the Twin Towers fall, Pat Tillman gave up his football career to defend our country. As he always did, Pat acted on his beliefs and tried to have a real impact on the things he considered important. He was a private person who had no desire to be the Army’s poster boy – in life or in death. Unfortunately, that is exactly what Pat Tillman became. The tragic irony is that the country that Pat fought so valiantly to defend chose to deliberately deceive his family and the American public about the details of his death. If only the Army could have shown the same level of integrity as Pat did during his lifetime.

As we approach the anniversary of 9/11, it is a good time to reflect upon how our lives have changed since that day and what we are doing to honor all of our fallen heroes and the soldiers still fighting to ensure our freedom. I think a good first step is to embrace the opportunities our country’s freedom affords us and make sure we are living our lives to their fullest potential, just like Pat Tillman did.



Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/