Wednesday, June 8, 2016

Pogo Is the Reason the 'Good Old Days' of Individual Saving and Investing Weren't All That Good ... But If We Heed Pogo's Advice, the Future Looks Bright Indeed

For individual savers and investors, the 'good old days' weren't all that good. But if we heed the lessons that could have been learned, the future looks bright indeed.

That's a result of the Pogo effect, "WE HAVE MET THE ENEMY AND HE IS US."

Let's consider the findings of a DALBAR study about the ill considered behavior of individuals with respect to overall stock market performance over several ten year periods:

"One conclusion: No matter whether the market is booming or busting, "Investor results are more dependent on investor behavior than on fund performance." Investors who buy and hang on are consistently more successful than those who move in and out of the markets.

For its data, DALBAR studies mutual fund sales, redemptions and exchanges each month to reflect investor behavior in the aggregate, as if the sum total of all inflows, outflows and exchanges were made by a single investor. That hypothetical investor's return is regarded as the average return for purposes of this study.

These "average" returns are compared with results of mutual funds themselves and of common indexes for stock and bond funds. This captures the effect of capital gains, dividends, interest, trading costs, fees, expenses and other costs.

Here are some highlights of what was found. . . .

In 30 calendar years (1984 through 2013), the Standard & Poor's 500 Index compounded at 11.1%. In that same time, the average mutual fund investor (as defined above) achieved a return of only 3.7%. In other words, actual investors actually earned barely more than a third of what they could have earned.

During the past 20 calendar years, the index was up 9.2%, while the average investor got only 5%. In the past 10 years, the S&P 500 was up 7.4%, and the average investor's return was 5.9%."

Pogo indeed!

So when it comes to saving and investing habits, let's say good riddance to those not-so-good-old-days. And what we do old folks have to offer in the way of useful advice to help the younger set avoid doing what too many of us have done? Why not use that hard earned, already paid for, and sometimes painful experience to try to do just that?

So was it better for saving and personal investing in the 'good old days' or will it be better in the future? And the correct answer is as always --- that depends on us. Pogo rules apply.

For one thing, 401(k)s and IRAs weren't even implemented until the late 1970s and early 1980s.

Fast forward to today and 401(k) and IRA plans have largely taken the place of most pension plans. As a result, individuals are left to our own devices to save and invest for ourselves and our families. But too often we're not capable of doing that, and the price to be paid for failing to prepare will often a big one.

So here's the question du jour --- Which way is better, the old school employer pension plan benefit or the 401(k)/IRA self directed way? And what difference does it make anyway?

Well, we'll report and you decide. Ok?

Believe it or not, investing has never been so simple contains some valuable information in assisting us to answer today's self graded quiz question:

"Most of today's investors don't know how good they have it. When I started in the business 50 years ago in 1966, the costs were much higher and choices were much more limited. Knowledge, understanding and information were primitive by today's standards.

This is not to say that investing is easy today. Investors face a daunting volume of choices. We're flooded with information and advice, much of it hardly more valuable than self-serving posturing.

Let's recall the investment scene in 1966, then contrast it with the situation today.

Investing in 1966

If you were an individual investor in 1966 . . . . Your investment choices may have seemed less crucial than they do today. More than three-quarters of large companies offered pensions to their workers at retirement (today the percentage is less than one-third that high). Along with Social Security, that was likely to cover your needs.

Still, you set aside money for the future. If you were average, you saved 11% of your income — more than twice today's rate.

Investing back then was quite expensive, and there was no way to avoid sharing a significant chunk of your returns with Wall Street.

Trading and information

The only way to buy stocks and bonds was through your stock broker. . . .

Online information? A pipe dream. Online trading? Utter nonsense. . . . Stock and bond commissions were regulated, and sky high by today's standards. A trade that would cost less than $10 today could cost many hundreds of dollars in 1966.

In addition, the spreads between bid and ask prices (the wholesale markup, in other words) was as much as 2.5%. (Today it is often less than 0.1%.)

In 1966, brokerages didn't compete on price. A few years later, it was considered a scandal (although a legal one) when the first discount brokerage opened for business.


There were some mutual funds available to individuals, of course. They claimed to charge buying commissions of 8.5%, but that up-front sales charge was actually 9.3% of the money that was invested on your behalf. Index funds hadn't yet been invented. . . .

Investors rarely complained about these high costs. This was just the way things were done....

Investment advice

Your sources of investment advice and information were comparatively limited. . . . The main distinctions presented to investors were vague mutual-fund descriptions like aggressive growth, capital appreciation and equity income. . . .

Your job as an investor was to identify and buy stocks that would do better than the market. To do that, you almost certainly relied on your broker. Oh, and "the market" back then didn't mean the S&P 500 Index. It meant the 30 stocks in the Dow Jones Industrial Average (which still, defying common sense, is widely regarded as "the market").

Investing in 2016

Today, as you know, the scene is very different. Trading costs and ongoing expenses are much, much lower. . . . Information is easily available online. . . .

Trading and information

Today's investing scene is not all rosy, of course. Our overall savings rate is about 5%, double what it was in 2007, but less than half of what it was in 1966.

Unfortunately, even in this new century, emotion-driven buy-and-sell decisions still cost investors untold millions of dollars, as evidenced by the depressing results reported every year by the DALBAR study. (At least today's investors have access to such information, something that was totally unavailable half a century ago.)

Wall Street is still intent on nickel-and-diming us to death with small fees and promises of gurus who see into the future. We're constantly taunted with suggestions that we can beat the market (which is itself a pretty lousy idea). . . .

Diversification . . . .

Far fewer of us can rely on pensions today, but we have access to IRAs and 401(k) retirement plans with favorable tax characteristics that were unknown 50 years ago. (Taxes on capital gains and many dividends are much lower today, as well). . . .

Investment advice

Here's another welcome change: Today, thousands of fiduciary advisors are available to help individual investors navigate the choices without a conflict of interest. (In 1966, to get fiduciary advice, you had to do business with the trust department of a bank.)

So overall, I think this is a much better time to be an investor. We are much more in control. But the way we exercise that control has a huge influence on our investment results."

Summing Up

To repeat, the comic strip character of my childhood Pogo said, 'WE HAVE MET THE ENEMY AND HE IS US.'

Pogo hit the proverbial nail squarely on the head when it comes to how our individual behaviors negatively impact long term personal savings and investing results. {NOTE: Please see the above linked DALBAR study for a more detailed and sobering analysis of just how bad a job we tend to do for 'us.'}

In the final analysis, saving and investing is up to each of us. Low cost and highly valuable investment help is available, but first we have know enough to act and seek it out.

Achieving solid investing results over time isn't all that hard. In fact, it's much easier to turn our investment dreams into reality now than it was during the 'good old days.'

Guaranteed pension plan benefits are disappearing with each passing year, but that can be a good thing, since our 401(k) and IRA amounts are just that --- ours.

We can create, grow and retain them throughout adulthood.  Unlike pension plan benefits, it's always our money.

Since I much prefer today's self help investing environment compared to that of yesteryear, that somehow must make me 'new fashioned.'

That's my take.

Thanks. Bob.

No comments:

Post a Comment