GenXers’ Stand Against Baby Boomer Financial Advisers
Jan 19 2012
This post was inspired by the Feedback post in the February 2011 SmartMoney magazine. The post by “GenXer” states,
“The reality is, we GenXers trust the baby boomers less than they trusted the Greatest Generation—and with good reason. Baby boomer financial advisers have taken more and left less than any other generation throughout history. These advisers say we shouldn’t be conservative at our age, but I think our grandparents, the Greatest Generation, would disagree. We hear their message; we just don’t agree with them.”
Disclosure: I’m a Baby Boomer. I’m a Baby Boomer financial adviser. I have two daughters who just made it into the Gen X era. Based on the points I make in this blog, I think it’s safe to say, GenXer disagrees with me. And I’m okay with that.
However, I think GenXer may want to expand his/her breadth of knowledge before going down the path of the Greatest Generation.
Assuming the philosophy behind the Greatest Generation is one of conservative savings, this philosophy is full of risks and is based on emotion; the fear of failure. We know the Greatest Generation’s fear stems from the Great Depression. As I have stated before on these pages, being conservative can be more risky than investing in stocks and bonds. And making any decision based on emotions is asking for trouble.
Being conservative means you are purposely choosing to “save” money instead of “investing” it. Saving money specifically means, protecting its value. Investing money means building wealth through capital appreciation.
Saving money doesn’t build wealth because it doesn’t provide enough return to offset the taxes and inflation eating away at its return. Looked at the returns on money market, savings accounts, CDs, and bonds lately? Pathetic. Will their returns go up over time? Sure. I’ve lived through better times with returns on savings. But I also lived through the rising inflation and interest rates that caused the better returns on savings. Those eventual better returns on conservative savings will not keep up with the costs associated with taxes and inflation that will exist in that time.
Oh, and those who point to the great bond returns over the last few decades… We lived through a unique environment of falling interest rates over that time. That provided rich soil for bond holders to cultivate decent returns. Those days are over with current interest rates at rock bottom levels. The future is one of rising interest rates. That is a killer for bond values. Best case scenario for bond holders is interest rates continuing to scrape the bottom which would mean bond values stay relatively stable with their low coupon rates. Not a future to bank on.
So if you follow the Greatest Generation down the path of conservative savings realize this; you are doomed to returns behind the power curve and a strategy that’s based in fear. Due to your lack of wealth building returns in a conservative account, you’ll have to compensate for your poor returns by pouring huge sums of your income into savings. Good luck with that. I’ve met plenty of folks who chose the conservative route who ultimately found they didn’t have enough savings to live the life they imagined in retirement—due to the fact, they didn’t save enough. Those that are satisfied with their savings either have no idea of how much they sacrificed in potential wealth or don’t care as they are willing to make do with less. Are you?
So where does that leave you? You have no choice but to be an investor. Only by being an investor can your money work hard enough to offset the taxes and inflation and build wealth. But, that’s where you disagree with me and you think investing is a time wasting, money losing proposition.
I’ll take a few wild guesses why you belief us baby boomers are wrong…
- You judge your success by your account value.
- You think account values and investments should produce fairly consistent positive returns year after year.
- Your account is up and down and generally going nowhere.
- The economy is rocky and unpredictable.
- People and the media talk about individuals losing their shirts, investment losses, and financial firms’ greed.
- The 99% protesters.
- The movies Wall Street and Margin Call.
- Mortgage companies stealing from people.
- Housing prices falling.
- Unemployment.
- The wealthy 1%.
For the most part, none of the items in the list matter concerning your ability to create wealth. I suggest the problem isn’t investing. The problems are:
- personal beliefs based on incomplete knowledge, and
- media/marketing efforts based on selling rather than providing a real public service.
To keep from writing a lengthy narrative to cover incomplete knowledge, you may want to check out these articles in this blog. They scratch the surface to explain why your beliefs are skewed at this point. They also explain how to manage investments to minimize risk. Believe it or not, “risk” is in all savings and investments. If you arm yourself with unbiased knowledge, you can manage and minimize risk using relatively simple investment techniques. As for the fear, fear is no match for knowledge.
- Chatting About Investments at Lunch
- Younger Worker-Investors Going Astray
- The Stock Market’s Not an Investment, it’s Gambling
- What’s a TSP/401k/IRA Investor To Do?
Now about that media/marketing issue. The news and financial media are only interested in getting you to watch, listen or read them. Big and splashy stories are best. Plus they only care about what’s going on today. We are so short-sighted people can’t even go to the gym for a workout without constantly checking their phones and Facebook pages for fear of missing some lame information. To quote a current mobile phone company ad, “That’s so 27 seconds ago…”, who cares!?
The media won’t educate the public on useful market/economic information because it’s boring and takes time to explain. They won’t waste their precious time on complex issues. They sell the sizzle not the steak. That’s because we live our lives as people with no attention spans. So we get what we allow; 30 second sound bites and tweets rather than in-depth reporting. And we remain ignorant about the investment knowledge demanded to be good investors.
The evening news reports the DOW is up or the DOW is down. The message is, if it’s up you made money and if it’s down you lost money. That couldn’t be more wrong and misleading for the working aged public (this is not about you retirees out there). A good example of media public disservice. Did you realize a down market is actually your friend and the only time average investors can capitalize on wealth creation? If you don’t understand why this is case, start studying.
Personal finance magazines are all about the latest trends and the products and services to “help” you manage the current situation. Following this advice is a recipe for failure. Successful investing isn’t about today. It’s about what happened in the past and what’s likely to happen in the future based on long-term historical trends—50-100 years ago. Believe it or not, nothing is really new. We’ve been there and done that many times over. The times may change but people don’t. “100 Top Mutual Funds You Must Own Now,” anyone? Don’t understand this, start studying.
Your friends, family and the man on the street are uninformed about financial issues because they only know what they read, listen to or watch in the media. I don’t mean that in a pejorative way. We are all intelligent people for the most part but our knowledge is sketchy outside our areas of expertise. Where we lack knowledge we are more susceptible to following trends, hearsay and the media hype at the moment.
Same with investment strategies and techniques and the media. You won’t be taught valid, practical ways to invest your money; ways that work and don’t take long to learn, implement, and manage for average people. These methods are boring and once you learn them, there won’t be anything else to amaze you with. Better to paint investing as a game of chance with “make or break” opportunities because that’s exciting and gets viewers, listeners and readers. Another media public disservice.
Remember this…as members of the great unwashed masses; we are the last to know of a real investment opportunity. By the time an investment is discussed in the media or by your uncle Joe, it’s too late to participate. The media wouldn’t be hyping it unless it had already become news worthy and this is after the opportunity for investment has passed. All the hucksters pitching the next get-rich-quick-scheme are feeding off the media and your need for greed; another emotion looking to do you in. Gold anyone? Oil and gas investments? Commodities?
Forget the media. You need to operate on real economic data not tainted by politics or media hype. Study the history of markets and economies over long periods of time; 100 years and more. You need to realize that situations and technology may change but market and economic cycles aren’t new and they are fairly predictable. To get a better understanding of your situation, know where you are in the country’s economic cycle and where the country is heading according to the history. There will always be “bubbles” and they will always pop. Recognize a bubble and plan accordingly or you’ll be joining those on the news claiming they are victims.
One last thing…no one has “…taken more and left less…” because building wealth and the economy are not zero-sum games as the media wrongly suggests. The idea of the top XX% owning XX% of the wealth in this country is just plain wrong and misleading. And the media talk of the income gap and the loss of the middle class is also misleading and dangerous. These current day stories imply a zero-sum game that is patently false.
No one with wealth today inhibits your ability to have wealth tomorrow. And other than an unscrupulous financial huckster, the tax burden is the real threat to your financial future. Only taxes literally take your hard earned income away from you denying you the opportunity to save and invest. Your after-tax income is used at your discretion—even when you give it to hucksters. Ever figured your total tax burden by adding all federal, state, county, property, school, local, gasoline, tolls, and sales taxes you pay in a year? Compare that total tax bill to your gross pay. Steamed yet?
Some have said I’m cruel for piling on the individual as the cause of their investment woes. It’s not my intent to be mean. It’s meant to get people to wake up. The fact is the common denominator in all these financial hardship stories is us…individual people. No one cares about us like we do. No government bureaucracy will ever protect you from your actions like the politicians want you to believe. People spend more time picking out their next mobile phone or e-book reader than investing in their financial knowledge and health. Whether you like it or not, you have no choice but to get involved in your financial future for your own sake.
Take time to educate yourself on the history of markets and economies. Learn the proven methods to invest your income and build wealth. Start with this blog. Then you will understand why listening to this baby boomer may be time well spent.
I agree with the author, not only bc he is my Dad and manages all of my family’s finances, but also bc he is incredibly well studied and honest with all people (if you didn’t know that, now you do).
GenXers, I feel that we are extremely impatient on the whole. We want whatever we want, now. So good luck saving money the old fashioned way, you would actually have to sacrifice, right now (and until you retire)…big time. In the meantime, I’ll be making huge gains by taking advantage of market dips. Do your research, and find a trustworthy place to get financial advice. If you’re reading this blog, you’re in the right place.
While I agree with most of the assumptions above I would appreciate a few things:
1. Where do we look for good financial guidance if not financial magazines?
2. Is Peter Diamond (Nobel Economics Laureate) wrong when he says that future returns will be less than the past? (I am referencing the author’s entreaty to look to the past for good market strategies)
3. What do we look for when we look for a good stock or mutual fund? A little guidance would be helpful. If you are going to disparage the available educational options, then tell us where to go.
4. The “one last thing” is misleading, and intentionally so. I’d strike it if I were you. At least explain yourself better. If you mean that to earn more by the market means that someone has to earn less, then say it plainly. I took it to mean that you deny the fact that the top X% of earners or wealth owns the top XX% of wealth…. that’s just plain mathematical fact whatever the numbers are. And yes, they are changing in favor of the wealthy. With your entreaty to study history, I would think that this would be included.
Since the post was big on reading and understanding I’m curious to know if you’ve read, “Where Are the Customer’s Yachts?” If so, what was you reaction? If not, I recommend you do and please share your thoughts.
I agree with the vast majority of the points the author makes and personally follow a strategy along the lines of what he advocates.
However, the extremely condescending tone in the article is off-putting. If you want people to actually listen to your advice, especially us “headstrong” Gen X-ers & Gen Y-ers, don’t tell us we’re “stupid” & “obviously haven’t done our homework.”
Erika – I’m sure your dad would agree with me that looking at it in terms of “taking advantage of the market dips” is the wrong way to look at it. That implies trying to time the market – which is also a losing strategy compared to consistent investing over time…though not as bad as stuffing the cash under the mattress or in a low-yielding bank account of course.
Remember the tagline to every financial advertisement “past performance is not an indicator of future performance” Just as you say not to count on the past bond market to plan for your future, I think counting on equities to carry you over the long haul may be a big mistake. To cite just one example of how the market has changed and isn’t going back is algorithmic trading (specifically HFTs), they don’t make money against each other, only against ‘low-frequency’ traders (ie investors). Read up on adverse-selection loss to see how the machines now run the markets for traders and investors aren’t going to see the returns of the past.
I tend to agree more with GenXer here, being one myself and one active duty I think the Boomers have by and large screwed over the country. Not all individuals of course, but on aggregate your generation single-handedly destroyed the nuclear family (costs of increased childcare and maintaining two households instead of one), failed to save enough for retirement (your entitlement obligations alone look more like a black hole than an actual ledger), and fueled the credit bubble through overspending on essentially garbage. In the process of all this, the boomers ensure that their children will be forced to cover the benefits they never paid or saved for (while largely eliminating them for their children at the same time). As the worker-dependent ratio decreases pretty soon each of us brain-dead GenXers (you really think we believe this b/c of movies?? – try budget projections) will receive a picture in the mail of the old-boomer we now individually support. Boomers, some of them anyway, will also be the last generation likely to see a retirement like the greatest generation. It was an anomaly anyway in the larger history of things, but so was the most of the post-war economic growth and only now is the world coming back to a more natural (historical) equilibrium, but I digress.
C’mon now, how many 55 year old males were there from the Greatest generation were divorced, had been $50,000 in the hole on consumer debt, then become unemployed and sucked up the government dole for 99 weeks because a new job wouldn’t have paid as much as unemployment? It’s disgusting, most of the greatest generation wouldn’t have chosen that path, unlike the millions of boomers who have.
I remember how shocked my father was when I told him I was constructing my financial plan on the assumption that Social Security would cease to exist by the time I retired. It sounds to me like you need to hear the same thing. Stop trying to deny it, I already know I’m going to be left holding the bag for you, just apologize and help us mitigate the damage to my children’s generation.
The Boomers will go down as one of the most destructive and profligate generations to ever scar America. Why? Simple, we’ll write the history books. I’m already planning on it.
Brian,
I didn’t see many boomers among the whining OWS faces over the past 4-6 months – mostly an under 30 crowd. Watch for them to re-emerge this summer and consider to what extent they represent Gen-X. Be sure to include a chapter on them in your history.
We are now in the most challenging times to develop and adhere to a long-term investment strategy since the 1970s. As a Boomer and individual investor myself (62 and retired), I agree with many of Shane’s points (esp. with regard to the media) but understand the apprehension of many younger investors.
I believe Boomer investors are influenced by the high inflation and volatile markets of the 70s and early 80s, as well as by the strong stock and bond markets of the later 80s and 90s. We fear being left behind by inflation and hopefully rising stock markets in the future. Also, if the economy and corporate profits are going to grow, we want a share of that growth — why be a simple consumer all your life if you can own a piece of successful businesses through stocks?
In answer to BR on what to read, I would suggest Morningstar (M*) for objective, respected analysis, including morningstar.com. I have subscribed to their products for 20 years and have found their work to be consistently solid and unbiased.
For most individual investors, mutual funds are the best option IMHO — although some enjoy competing against professional investors with vastly greater resources. I believe the top 10-20% of fund managers can provide better returns or lower volatility (or both) over 5-10 year periods than the indexes and that it is possible to identify many of these managers based on their records. Past returns are important but equally important is downside risk, usually measured by volatility (eg. standard deviation). Morningstar’s star ratings account for both volatility and return (gains or losses), but I recommend ignoring the “Overall” ratings and only use ratings for set time periods (3, 5, 10 yrs) to compare funds.
Morningstar now has Analyst Ratings (Gold, Silver, etc.) which so far appears to be a reasonably sound system for identifying the best-managed funds, in M*’s opinion.
I also prefer active managers over index funds: most indexes (eg. S&P 500) are capitalization weighted, so the largest companies get the highest weighting just for being biggest, regardless of whether they are the best investment. This is part of the reason why the indexes soared in the 90s and have been almost flat over the past 12 years. The Vanguard 500 Index fund returned an average of 0.5% per yr from 1/1/2000 to 12/31/2011. Many well-managed funds averaged 5-10% per yr over the same period, although no manager beats the averages every year.
Diversification among several asset classes is essential, and I think balanced or moderate allocation funds, which own stocks, bonds and possibly other assets, are best for beginning investors.
GenXers aren’t under 30 anymore, those are millennials, but nice try.
You sadly seem less and less informed the more you write.
“Don’t spend $$ you don’t have, on things you don’t need, to impress people you don’t even know or like!”