The Independent Investor: It Is No Longer Enough to Simply Manage Money
Back in the day, money managers were revered. News stories spotlighting the year's "hottest hands," or that hedge fund's rising star were all the rage. Retail investors chased performance and paid for it. But times are changing, and simply beating the market for a year or two fails to impress most investors.
And with good reason.
Most of us are in the investment game for the long haul. We are saving for retirement: a process involving decades of saving and planning. Chasing the firm or adviser that "beat the market" this year has turned out to be a disastrous approach to that concept.
Most of us have now realized that you can't beat the market. Sure, for a certain period of time — days, months, even a few years — you can, if you are lucky. Over time, however, your performance will revert to the mean, which in this case is the average returns of the market overall. So, paying a money manager a high fee year after year to provide outsized performance is a fool's game.
On occasion, I meet some prospective clients, who still believe that's possible. They have run from adviser to adviser with great hopes followed by disappointment, and then bitterness and blame. As a fiduciary, I am required to tell them the truth. For those who don't believe it, I quickly show them the door.
Given the facts of financial life, why, therefore, should you pay a money manager yearly fees simply to give you what the market gives you? Why not save your money and buy an index fund and be done with it?
I think that is a rational approach for some of us, at least those who can weather the ups and downs of the markets without getting emotional (selling low and buying high). If you have the discipline to stick to a plan for many years without swerving, changing, or being influenced by outside events than you can manage your money as well as any manager. The problem is that few of us can do that. The rest of us need a coach and that's what you are paying for, but even that is no longer enough.
But how much is that worth? If, over the next decade or two, investment advisers continue to charge large fees for simply providing market returns and "coaching," I believe there will be far fewer of us around. The advent of artificial intelligence portfolios at substantially reduced fees is simply the first shot over the bow for an industry that hasn't changed in the 40 years I have been in it.
In my opinion, investment advisers are at a critical juncture. While they beat their chest for providing an extra percentage point or two for their clients, they ignore an entire array of financial challenges that could prove fatal to their clients. I have been writing columns on many of these issues for years.
The rising cost of health-care poses a greater challenge going forward than any down draft in the stock market. Protecting your assets and passing them along to your children is equally (if not more important) than identifying the next internet darling in the stock market.
When and who should take their social security benefits, or having enough money to put your kids through college are concerns that are just as important as what the market did this year. Elder care planning, financial planning and advice on veteran's benefits are some additional areas where more and more of us are going to need high-caliber expertise.
As market performance becomes the norm, and more and more investors focus on what really matters — a holistic approach to managing their wealth and welfare — who among the nation's advisers can offer all of these services? Outside of our firm, I can't think of any. And this is not an advertisement; it is a call to action for an industry that is stuck in their ways that they need to change or perish.
The Independent Investor: Are Americans Saving Enough for Retirement?
If you simply read the headlines, you would assume that over half of Americans aged 55 and over, have no savings as they approach retirement. That's a dramatic statement, but is it true?
Most statisticians derive that data by adding up those who have an IRA or similar tax-deferred savings account such as a 401(k). The latest data compiled by the Federal Reserve Bank's Survey of Consumer Finance indicated that 53 percent of households, age 55 to 64, had some savings in those tax-deferred accounts. So, yes, by that standard, almost half of all Americans fail the savings test.
But what about all the people who work for the government? There are 22 million workers toiling away within the ranks of federal, state and local government, and all of them have traditional defined benefit pensions.
That's 14 percent of the labor force! Those pensions have amassed
anywhere from hundred thousand (maybe less) to $1 million or more.
While corporate pension funds have been seen a multi-decade decline among workers, there are around 13 percent of private sector workers who are participating in defined benefit pension plans. In fact, roughly 40 percent of all workers between 55 and 64 years of age are expected to receive a traditional pension benefit in retirement.
When you add all those segments together, the outcome is entirely different. Almost 75 percent of workers in the U.S. either have a tax deferred savings account or a pension account. That still leaves a goodly portion of Americans coming up short. However, all is not as bleak as it looks for those people.
Let's talk about the low-wage earners making around $10,000 per year over their lifetime. When they retire, they will receive Social Security benefits. Those benefits could equal as much as 84 percent of their yearly salary. Almost 19 percent of Americans fit within that category, according to the Social Security Administration,
Can some one in retirement live on $10,000 a year? Not likely. Remember that Social Security was never intended to be a retirement account. It was simply unemployment insurance that could help a worker feed his family until he found a new job during the Great Depression. Today, given that we now have unemployment insurance in addition to Social Security, the population has come to think of it as a retirement benefit.
As you can see, most Americans have and are saving for their retirement. That's not the question. How much you are saving is the critical variable in this equation. How much should I save, you might ask, to see me through my golden years? My answer is, whatever you might think, most of us are not saving enough.
The way to begin answering this question accurately is to find out how much you and your family are spending per year. For every household who can answer that, I see at least 20 families who have no idea what their yearly expenses are. It should be obvious that without knowing your expenses, there is no way you can know how much you might need once you retire.
My advice is to find out now, while you are young or at least middle-aged, and set up an appointment with a Certified Financial Planner. Few people have the ability and financial education to create a lifetime play of savings all alone. Make sure that the CFP is a fiduciary and spend the money.
The Independent Investor: What's Up With Oil?
Two years ago, the experts were telling us that the price of oil would continue to fall. Twelve-dollar oil was a real possibility. The end of OPEC was nigh as well as their ability to influence geopolitics. It appears those predictions were premature.
The price of oil has more than doubled over that time, from roughly $30 a barrel in the spring of 2016 to over $71 a barrel today for West Texas Intermediate crude. Those same experts now expect the price could gain further, but there is no agreement on how much higher it can go.
The "swing" factor in that equation is firmly in the hands of American shale producers. They are the culprit of the past three-year decline in oil prices and will likely be the key determinant of future prices in the short-term.
In November, U.S. crude production exceeded 10 million barrels a day. We haven't seen that since I came home from Vietnam back in 1970. There is a real possibility that America could become the world's largest oil producer by the end of this year. That would put us ahead of both Saudi Arabia and Russia. What a change that has been since the days of the OPEC-instigated oil embargos, long lines at U.S. gas stations, and rationing!
The impetus for this astounding change in our fortunes has been the developing technology, which was largely government-funded, that has allowed U.S. entrepreneurs to explore and develop enormous oil and natural gas-rich shale deposits throughout the country. But that's only the beginning of this saga.
These producers, unlike traditional oil companies, can turn their energy spigot off and on at the drop of a hat. Typically, the oil majors such as Exxon or Saudi Arabia's Aramco, require five to 10 years to develop conventional oil reserves. Once in place the oil flows and it is difficult to change course quickly, whereas these unconventional players have developed their drilling and fracturing techniques to the point that they can respond to price changes within a few months.
At the same time, these modern-day wildcatters have cut their cost of production dramatically. They now represent half of all U.S. production and are increasingly profitable. For the first time, many of them will be able to fund future drilling and exploration through their own cash flow. The Permian Basin in Texas and New Mexico is the favorite target of future expansion.
However, that is not the whole story. It appears that even with a dramatic increase in shale oil production, the demand for oil in the short-term will outstrip supply. The world's economies have been growing and organizations such as the IMF are forecasting further growth in the years to come.
Oil and its derivatives, you see, are still needed to fuel this growth, despite advances in alternative energy. Every year, roughly four million barrels are consumed by the world's furnaces and engines. Oil analysts expect an additional one million barrels per annum will be necessary to satisfy future world demand.
That means energy producers will need to replace about 40 percent of this year's oil production over the next decade or so. The most logical and cost-effective approach to this challenge would be to exploit global reserves of shale oil. These deposits are abundant in just about every corner of the world. The problem will be in extracting it. Other countries are far behind our own energy producers. They will need to develop their shale ecosystem and supply chains from scratch.
Since most of these nations are either traditional oil producers/exporters or importers of oil, they will need to spend billions of dollars in new investments to gather, treat, transport and store these new shale oil deposits. As for their existing oil fields, oil majors will require a great deal of time and effort, as well as investment in new technologies, to compete with low-cost shale producers.
While longer-term demand for oil will likely remain robust, in the short-term, we can expect to see continued price volatility in the markets. That's because shale producers will be quick to jump-start new production as prices spike higher, and turn off the spigot when prices fall. It is no longer an OPEC-controlled market where Middle Eastern dictators and kings set prices and the world adjusts. Today's wild and wooly free market will require a strong stomach and an even stronger capacity to absorb sudden and sharp changes in price.
The Independent Investor: Financial Scams Targeted at Elderly Are Epidemic
As Baby Boomers age, the volume of reported financial scams directed against them continues to escalate. By some estimates, more than $37 billion a year is now being stolen from America's elderly. And those are only the reported cases.
It is estimated that 5 million Americans are bilked by con artists every year. Some financial firms believe the total can exceed $37.5 billion annually. The Office of Children and Family Services in New York begs to disagree. They say that in their state alone $1.5 billion a year is stolen. And for every case that is reported, 44 are not.
Aside from the impact of losing their entire savings, elder fraud victims are dying at triple the death rate of other elderly adults. That is understandable when you realize the physical and emotional devastation that results from this type of fraud. Rarely, if ever, do the victims get their money back. The stress and time required to pursue the criminals increases the impact on senior victims' health and well-being.
"I'm a trusting person," says Dorothy, my 89-year-old, widowed, mother-in-law, who was a victim of a computer scam. Fortunately, she did get her money back, thanks to her adult childrens' quick response to the incident. Asked why she would give her credit card information to a total stranger, she shrugged and said, "I never expected that people would do things like that."
Last month, the Justice Department announced the largest nationwide investigation of elder fraud cases. This incident victimized over one million people with estimated losses of over $500 million. In this case, the perpetrators used mass mailings and telemarketing to ensnare innocent and trusting victims such as Dorothy.
What makes matters worse is Americans are living longer and many of them will suffer some form of dementia. Roughly half the population over 89, show some signs of impaired memory or other cognitive problems. That makes the scam artist's job even easier. And the more money you have, the higher the chance that you will be targeted. These criminals do their research carefully, identifying just the right set of circumstances that would make their victims an easy mark.
At my firm, which is small compared to the billions many of our competitors manage, I have seen several attempts of financial fraud among our clients. Fortunately, because of our size, we have been able to identify and thwart these efforts. The facts are that advisors like ours may be your best protection against these scammers. You see, many states now mandate that resident advisors notify authorities if they suspect that one of their clients may be the victim of financial fraud. Here in Massachusetts, there is no such rule, but that doesn't matter to us. We believe it is our duty and obligation as fiduciaries to report any such actions.
It has happened to me personally. I detected monthly withdrawals from an elderly client's portfolio that was above and beyond her normal monthly withdrawals. After questioning her, I contacted elder services in the area, who in turn brought in the police. It turned out that her "trusted" personal assistant, who had access to her account, her credit cards, and everything else financial, had a gambling problem. She was financing her addiction by stealing from her client's checking account. Even though she was caught red-handed, she eluded jail time because she argued that she had "permission" to take what she needed from the account.
Trusting your advisor in this day and age, where one in every 13 financial advisors has been disciplined for some sort of misconduct, may seem like an oxymoron. It boils down to being sure that your advisor is, first and foremost, a fiduciary, who you trust and can supply the background and credentials to warrant that trust. Second, that he or she has a limited number of clients. The more clients, the more difficult it is to be able to spot and report instances of financial fraud.
The Independent Investor: The Opioid Effect
Opioids are killing us. Both literally, as well as from an economic point of view. The economy has already suffered over $1 trillion in lost potential and those losses appear to be growing by the hour.
Last year, 62,000 Americans fatally overdosed on some form of opioid. It is getting to the point that almost every one of us knows someone who is either addicted or died from these drugs. However, while death is a tragedy, we tend to ignore how much this problem is costing our society.
"You can't put a price tag on the death of a loved one," we say, but actually we can. It's called the "value of a Statistical Life," or VSL. Federal agencies routinely use VSL measures in estimating the expected fatality risk-reduction benefits of a proposed safety regulation. It is based on studies that track how individuals trade off wealth for reduced mortality risks.
For the most part, the riskier the job, the more income a worker will demand to do it.
Recently, the President's Council of Economic Advisors incorporated this concept in assessing the economic costs of the opioid crisis. They found that for years, we have been underestimating the price tag of this crisis by not including VSL. To put this in perspective, in the next two years alone, by applying the concept of VSL the opioid crisis will cost the United States over $500 billion.
Let me explain why: As more and more young people succumb to this scourge, the economic costs begin to accelerate year after year. Statistically, the average age of overdose victims is about 41 years old. Think of all the lost wages and productivity that could have been, but will now never occur, times the number of years of one's expected life. Currently, that is estimated to be around $800,000 per person's death, according to a consulting institute, Altarium, which is measuring this trend.
However, that doesn't include other costs such as lost tax revenues, additional spending on health care, education, social services and the criminal justice system. If one just analyzes the health care cost alone from 2001 to 2017, the opioid health care price tag was over $217 billion.
Unfortunately, those health care costs seem ready to explode in the months and years to come. President Trump, who has rightfully recognized the gravity of the situation, has proposed that $17 billion in extra spending be directed to combating the crisis. Of that amount, $13 billion would be ear-marked for expanding access to prevention, treatment and recovery support services.
The consequences of this problem continue to show up in ways that few of us would expect. For example, two-thirds of America's youth don't qualify for military service today. Besides behavioral, educational and physical failings, a goodly number of those kids have addiction issues. How many? One out of every six young adults (between the ages of 18 and 25) battle a substance use disorder.
On the other end of the scale, an estimated 15 percent of elderly individuals suffer with substance abuse and addiction. It is something that I personally must watch for among retirees.
As we get older, we need more medical treatments, many of which involve surgery. Take me for example, I had both knees replaced over the last three years, plus prostate surgery.
Let me tell you, the pain meds flowed like manna from heaven. All the most notorious prescription opiates were at my beck and call. Fortunately, I was also trying to run a business, deal with the markets, and talk to clients. I was just too darn busy for pain meds. But I am an exception.
Consider the typical 60-70- 80 something, patient who is retired that has little to occupy his or her waking day, where the temptation to abuse these prescription meds is enormous. It has escalated to the level where Investment advisors like me are now being trained to identify the symptoms of opiate addiction or abuse among our clients.
No question about it, this opioid crisis is hamstringing the nation where it hurts the most, its people. Anything we can do, public or private, to stem the spread of this pandemic should be one of our highest priorities. Fortunately, our president feels the same