The Ten Roads to Riches
Page 25
How would my asset mix change if you forecast a bear market? A bull market?
Who’s responsible for making those forecasts? And how successful have they been?
How has your recommended asset class mix changed over the last 10 years?
What do you monitor, specifically, to forecast the market’s direction?
How does your market forecast affect your asset allocation recommendation?
Global market leadership has always and will continue to shift over time . . .
Who makes changes to my portfolio’s domestic versus foreign mix?
How do you (or your firm) know when and how much to under- or overweight US stocks?
How do you (or your firm) decide which countries to invest in and which to avoid?
Who makes these decisions, and do they have a proven, verifiable track record?
Overallocating to the wrong equity style can seriously hamper performance . . .
What is your firm’s equity style? Large or small cap, growth or value? All?
Will the style mix be static, or will there be ongoing changes?
What makes you/your firm shift in or out of small or large stocks? Value? Growth?
What makes you/your firm shift in or out of specific sectors?
The right manager’s interests are fully aligned with mine . . .
Are you a Registered Investment Adviser or a broker?
Aside from what I pay directly, what other compensation do you receive (e.g., commissions from insurance products, incentives for selling stocks or bonds from your firm’s inventory, spreads on the sale of bonds)?
Can you demonstrate your firm’s money management capability? Can I see: GIPS (accounting standard) compliant performance for your clients’ accounts?
A public performance history of strategic market decisions?
How your decision making worked through the last bear market and recovery?
How is your firm structured? Do client service reps double as salespeople?
What resources do you offer to educate clients?
Believe me, staying in stocks is harder than it sounds. You will absolutely be tempted to bail when the market gets bumpy. Don’t do it unless you’re really, really, really darn sure stocks will fall a lot for a significant period. Don’t do it after they’ve fallen a lot. Ask yourself, what do you know about market timing that everyone else doesn’t? My guess is, nothing. Again, if you do you should start an OPM firm (see Chapter 7).
How can you know if it’s a bear market? It’s tough. It’s certainly not when everyone expects one. Professionals are terrible at forecasting bear markets. The media is worse. So if folks are commonly predicting bad times, know you should own stocks. Again, to become a bear scholar, go read my 2007 book, The Only Three Questions That Count. If you won’t do at least that much individual study, you shouldn’t try to make these decisions yourself.
Bearing with Bears
Even if you suffer a bear market fully invested, it’s OK. Stocks’ long-term superior averages include bear markets. You needn’t miss every bear market. True passive investors rigidly remain invested in good times and bad, no matter what! And they overwhelmingly beat those who try to time markets. To time markets, you really must know what you’re doing, and precious few do. That’s really hard.
One warning: Corrections are different from bear markets. They are short, sharp shocks—big, sudden drops designed to scare the pants off you. They can happen once or twice a year. Don’t be fooled. Remain invested and it will be over in a few months. Real bear markets start slow and calm. People are optimistic after the peak. Anyone pessimistic then is seen as nuts. Stocks drop a little month-to-month, but nothing dramatic. Meanwhile, fundamentals unravel and few notice. Bear markets don’t start violently—not even in 1929—if measured correctly. (See my 1987 book, revised in 2007, The Wall Street Waltz, on this.)
BONDS ARE RISKIER THAN STOCKS—SERIOUSLY
But wait! Can’t stocks be down huge? Isn’t it better to give up some return for a sleep-at-night factor? No. Remember, this is The Ten Roads to Riches, not The Nine Roads to Riches and One Road to a Comfy Night’s Sleep. In the long term, stocks aren’t risky. In the short term, they’re volatile, which scares people. Ignore the caveman in you wanting to hide from scary things. Investors fail with long-term returns because they can’t get this in their bones: The near term doesn’t matter—hardly at all! The roads to riches are long. The following box shows the stock-versus-bond decision over 20 years. It’s a no-brainer. Since 1926, there have been 72 twenty-year rolling periods. In 70, stocks beat bonds—848 percent to 246 percent! The first period bonds beat stocks, January 1, 1929, through December 31, 1948, saw the Great Depression and World War II. But bonds barely beat stocks—1.4 to 1. The second, January 1, 1989, through December 31, 2008, saw the tech bubble burst and the global financial crisis. Then, too, bonds just barely won—1.1 to 1. And both times, stocks were still up overall. So it isn’t worth the risk with bonds at all, long-term.
The Stock-versus-Bond Decision
Stocks have outperformed bonds in 97 percent, or 70 of 72, of 20-year rolling periods since 1926.
Average Total Return over 20-Year Rolling Periods
US Stocks 848%
US Bonds 246%
Stocks outperform bonds by a 3.4-to-1 margin.
In the two periods when bonds outperformed stocks—January 1, 1929, to December 31, 1948, and January 1, 1989, to December 31, 2008—it wasn’t by much.
Average Total Return in 20-Year Periods when Bonds Outperformed Stocks
US Stocks 239%
US Bonds 262%
Bonds outperform stocks by a 1.1-to-1 margin.
Source: Global Financial Data, Inc., and FactSet, as of 1/12/2017.
Still unconvinced stocks are better? Most folks think bonds are safer. They are, if you just consider volatility risk over short periods. Fact: Given just a bit of time, stocks not only have far better returns, but more consistent ones. Figure 10.5 shows three-year trailing returns, adjusted for inflation and taxes, for bonds. Compare that with stock returns in Figure 10.6.
Figure 10.5 Real After-Tax US 10-Year Treasury Returns, 1926–2016
Source: Global Financial Data, Inc., and FactSet, as of 1/31/2017
Figure 10.6 Real After-Tax S&P 500 Returns, 1926–2016
Source: Global Financial Data, Inc., and FactSet, as of 1/31/2017
Given a bit of time, stocks have fewer negative periods than bonds. Even supposedly safe US Treasuries have periods of multiple, consecutive negative returns. And three-year returns over 10 percent are rare. Yes, stocks’ negative periods are bigger, but they’re blown away by the bigger, more consistently positive periods. If you have a longer time horizon (you do), stocks are less risky.
Maybe you’re one of the many who believe “everything’s different now” and the world’s worse, and capitalism is horrible, and stocks are done. Forever! That was a fringe view when this book first came out, but post-crisis, it’s everywhere. No system is perfect, but capitalism took us from subsistence farming to high-tech space-age prosperity. It still works. Moore’s law hasn’t run out yet. Your smartphone does more than the world’s most powerful computers did in the 1980s. Drones have started delivering pizza in Australia. With new technology come boundless opportunities for creative users to spinnovate tech into some product or service you can’t live without. All fuel for future earnings—and stocks.
There are some people who, no matter what, won’t ever hold 100 percent stocks. If this is you, that’s fine! Just remember, when calculating for how much to save each year, use a lower return expectation. It will be tougher and slower to get rich on this road if you don’t use the magical power of stocks’ superior compounding returns. It can be done, though it takes longer. From our earlier example, to get $6 million over 30 years with less stocks, maybe you assume an average 7 percent return. That means saving $63,500 a year with a better-paying job. If you can, great! If not, maybe retire
later, start saving earlier (you get to $6 million at 7 percent in 40 years saving only $30,000 a year). Or maybe die sooner. It’s up to you.
Stocks, Stocks, and More Stocks . . .
I spend no time telling you how to pick winning stocks because, first, no one can teach you to do that in one chapter. For that, go to my first and fourth books (Super Stocks and The Only Three Questions That Count). Next, the decision whether to hold stocks, bonds, or cash, and in what percentage, determines most of your portfolio return. Stock-picking, done right, still doesn’t add that much to your returns. My firm does that for a living. Trust me.
LIKE HETTY?
On this most common road there are few famous folks to learn from. One famous character and one of my favorites was too frugal—Hetty Green. Hetty didn’t much do stocks. She rarely sought big returns—aiming for 6 percent (before income taxes existed) via mostly bonds. She bought stocks only at the height of panic when stocks were cheap. She had ice water for blood—she was sanguine during market crises that made somber men sob in fear.
In 1916, she died with about $100 million.4 She saved every penny. Hetty didn’t need higher returns. She was neurotically frugal. She didn’t spend on clothes—she wore the same black dress endlessly. She sewed securities (before online trading!) into her dress and shawl for safekeeping—they kept her warmer. She had her son resell her newspapers. She lived in a cold-water, unheated apartment. She could afford anything but ate mostly oatmeal and graham crackers. When her young son injured his leg sledding, she wouldn’t pay for a doctor. She stood in line for a free clinic and used a homemade poultice. It didn’t work. Her son’s father (whom she ditched—he wasn’t good with money) stepped in to pay to have the gangrenous leg amputated. She wouldn’t.
For a woman to build a portfolio over $100 million in those days wasn’t rare—it was unheard of. Her financial prowess and shabby attire earned her the nickname “the Witch of Wall Street.”
So no, you don’t need stocks’ superior returns on this road. But I bet you won’t let your kid’s leg get so bad it needs to be amputated. You can do it like Hetty, or you can ignore your fears and handle more stocks. Or you calculate what you’ll need to save given a lower return expectation.
READING FOR DOLLARS
There are thousands of books on saving and investing. Most aren’t so good—it’s the same advice over and over again. If the advice worked in the first place, you wouldn’t need the same old advice regurgitated countless times—just the one book would suffice. But don’t be discouraged. You can read the ones I recommended earlier, or one of these.
The Ultimate Gift by Jim Stovall. I gave a copy to each of my sons—a story with a key message—not only how to think about money, but how to be a better human being.
The Millionaire Next Door by Thomas J. Stanley and William D. Danko. This one won’t tell you how to save or invest, but it was pretty eye-opening for a lot of folks when it first came out. It’s true: Most millionaires are Average Joes.
If you can’t tell a stock from a bond from cattle futures, read Investing for Dummies by Eric Tyson. Here you’ll learn how to open an account, navigate a broker, and start buying stocks.
The Only Three Questions That Count: Investing by Knowing What Others Don’t by yours truly. Fact: Most investing books are bad for your health. They tell you to “only buy these stocks, not those” or imply there’s some magic equation. Nonsense. You can’t beat the market by doing some trick a million other people can read about. To beat the market, you must know something others don’t. Tough to do! My book shows you how to figure out what most others don’t know using just your noggin and some statistics. For that matter, try any of my other stock market books: Super Stocks, The Wall Street Waltz, Beat the Crowd, or 100 Minds That Made the Market (with a Hetty Green biography).
The Guide to Saving and Investing
This is the most commonly traveled road. Done right, it yields pretty consistent results. No, you won’t be a mega-millionaire—unless you’re neurotically frugal and live on oatmeal. But you can easily get to a few million and a pleasant retirement by following these steps:
Get a decent job paying a good wage. With a high-paying job, or one that will eventually pay well, you save more, more easily. Do what you love, but it’s best if what you love pays above-average.
Figure out how much you want/need. Don’t just save without a target. Think about what you want to live on. Don’t forget to adjust for inflation.
Calculate what you need to save each month. Based on your goal, figure out what you must save. You don’t have to save the same amount each month or year, particularly if you’re young. You can create a plan to increase saving over time. But remember, money saved earlier is worth more later. Get started now.
Now save. How? Your choice: Be frugal. Earn more. Do whatever to keep up with your saving plan. Most books preach frugality—some folks can’t do it. If that’s you, get a raise.
Make your money work. On this road you must own stocks, pretty much always. Stocks have better long-term returns. If you’re on this road, you have a long time to invest. If you just can’t stomach volatility, plan accordingly. Reduce your return expectations. Save more. You can still get rich with less stocks if you plan well and are disciplined.
NOTES
1. FactSet, as of September 16, 2016.
2. FactSet, as of January 12, 2017. MSCI World Index return with net dividends, March 24, 2000, to December 31, 2016.
3. FactSet.
4. Almanac of American Wealth, “Wealthy Eccentrics,” Fortune, http://money.cnn.com/galleries/2007/fortune/0702/gallery.rich_eccentrics.-fortune/2.html (accessed May 20, 2008).
INDEX
Acting business
Active management of funds
Acton, Brian
An Actor Prepares (Stanislavski)
Adelson, Sheldon
Advance Publications Inc.
Affleck, Ben
Agents
An Agent Tells All (Martinez)
Allen, Kathleen, Entrepreneurship for Dummies,
All You Need to Know About the Music Business (Passman)
American Steel (Preston)
Armstrong, Lance, and Sally Jenkins, It’s Not about the Bike,
Asbestos, as litigation target
Asperger’s Syndrome
Assets, equitable distribution of
Attacks on businesses
Auctions of property
Audition (Shurtleff)
Aycock, Dave
Aykroyd, Dan
Back Stage magazine
Ball, David David Ball on Damages,
Theater Tips and Strategies for Jury Trials,
Ballmer, Steve
Barkin, Ellen
Bear markets
Beat the Crowd (Fisher)
Bennett, Scott, The Elements of Resume Style,
Bennett, William
Benton, D. A. How to Think Like a CEO,
Bergsman, Steve, Maverick Real Estate Investing,
Berkeley, William
Bernesian psychology
Bernhard, Arnold
Berra, Yogi, xvii
Beshara, Tony, The Job Search Solution,
Beyoncé
Beyond Entrepreneurship (Collins and Lazier)
Bezos, Jeff
Bingaman, Jeff
Bitran, Gabriel
Blankfein, Lloyd C.
Blecharczyk, Nathan, xiv
Blixseth, Timothy
Bloomberg, Michael
Bolles, Richard Nelson, What Color Is Your Parachute?,
Bonds, investing in
Books, writing. See also Reading/books
Bootstrapping
Bose, Amar
Breaking Into Acting for Dummies (Garrison and Wang)
Bren, Donald
Brin, Sergey
Brockmann, Alex
Brockovich, Erin
Brokerage accounts
Brusin, Mike
Bryant, Kobe
&nbs
p; Buffett, Warren, xix
Building codes
Burkle, Ron
Businesses buying, to become nonfounder CEO
culture of
financing for
founding
growth of revenue of
picking path for
plan for
product for
public or private status for
reputation of
valuing
Caesar, Julius
California real estate in
taxes in
Capital-intensive businesses
Capitalism
Capital preservation
Carnegie, Dale, How to Win Friends & Influence People,
Carter, Shawn Corey (Jay-Z)
Caterpillar
Celebrity examples of
guide for
media mogul road to
resources for
talent road to
types of, xix
CEOs guide for
as helping build people
leadership of
nonfounder
passion of
paths to becoming
payday for
resources for
as superheroes
See also Businesses; Founders
Cerebral palsy, as medical malpractice
Chang, Jin Sook
Chapman, Anna
Chapman, William Dean
Charity activities
Cherng, Andrew
Cherng, Peggy
Chernin, Peter
Chesky, Brian
Clients getting and keeping
reputation of business and