Simplifying Complex Investment Concepts
MARTHA SHEDDEN
Tell me how you came to work in finance and write about it in different publications.
MARK HULBERT
After graduate school, one of the projects I got involved in led me to attend a couple investment seminars, which used to be the way people would hear about investment newsletters. It's hard for us to imagine in today’s world, dominated as it is by the internet, that investment conferences were one of the main ways of getting exposed to investment options. The first one I attended was the granddaddy of the investment conference world; it was in October of 1979. There were 10,000 investors there.
It was right at the height of the gold mania. People would line up between talks at a bank of payphones to call their broker to make trades. The level of energy and excitement was great. I knew that all the speakers couldn’t be right in their market predictions, because some of them were contradicting each other. Each claimed that if we had been smart enough to follow him the previous year, we would all be rich.
I thought that it would be great to have a service to keep track of their performances. So, that’s what I created. This was early in the computer age, but I was able to set up a trading environment simulation on my computer. I received data feeds from all exchanges and set up portfolios according to what newsletters were telling clients. Then I traded those portfolios. I used prices that prevailed on the day an anonymous subscriber would be able to act on the advice rather than the price that prevailed when the editor first thought about it. It was realistic from that point of view. I’ve taken bid-asked spreads into account, and I've charged discount brokerage commissions. I let the chips fall where they may.
My first issue of the newsletter was released in the summer of 1980. I’ve been working in this area now for 42 years. Until 2016 I was tracking 200 separate newsletters that had more than 600 model portfolios. The newsletter was acquired by Dow Jones in 2005. In 2016 Dow Jones decided they didn't want to be in the newsletter tracking business, so they shut down my tracking operation, but they still wanted me to continue writing for them. For the last five years, I've devoted 100% of my energy to writing about the investment themes that I learned over the prior 35 years.
I first started writing columns in 1986 for Forbes Magazine. I wrote for them for a little over a decade. Then I wrote for the New York Times. Then in 2002, CBS MarketWatch bought my newsletter. I started writing for them and they, in turn, got purchased by Dow Jones in 2005. I've been writing for the Wall Street Journal and Barron's in addition to MarketWatch ever since.
MARTHA SHEDDEN
What investment trends are you seeing for soon-to-be retirees or those who have retired that people should be aware of?
MARK HULBERT
That's the $64,000 question. Looking back over the 40-plus years of my career, I’ve come to the conclusion that the markets are far more unpredictable than any one of us could imagine. We need to take that into account, as it translates into our need for great humility when predicting where the markets are going, and the need to build a large buffer or margin of error into any of our retirement plans. This is important because we're planning much longer retirements than ever before. We simply don’t know where the markets will go over the next 20 to 30-plus years, and yet the range of possibilities could have a huge impact on our retirement standard of living. You should step back and reassess whenever you think you know what the market will do in the future.
With a healthy dose of humility, I think it’s also true that the markets over the next 20 or 30 years are almost certainly going to produce a lower rate of return than what we've seen over the last 20 or 30 years. That's a big adjustment that we must consider. Many of the financial planning assumptions we make based on history are fraught with peril because they're based on one of the most extraordinary periods in U.S. market history.
In 1981, for example, the 10-year yield was more than 16%. Last year, it was below 1%. That's an extraordinary period for bonds. If it stays constant at 1% for the next 20 or 30 years, bonds will only produce a total return equal to their initial yield, which is to say 1%. We can almost guarantee that the extraordinary bull market in bonds over the last 40 years will not be repeated.
It’s the same with the stock market. Right now, both the market’s PE ratio and the Shiller PE are well above average levels. The lesson of history is that it's unlikely the markets will produce above-average returns in the wake of those kind of valuations. For us to have similar returns for stocks for the next 20 or 30 years, as we've seen for the last 20 or 30 years, valuations would have to go up beyond anything that's ever been seen in U.S. history, which isn't to say it couldn't happen, but I think that it requires a huge leap of faith. We need to put into our financial plans the assumption that we're going to have lower returns going forward. Interest rates reflect growth opportunities in the economy and lower interest rates mean there's less growth potential in the economy. Those reduced growth prospects must translate throughout the financial markets. I don't see any other way around it.
MARTHA SHEDDEN
Recently, you wrote an article for MarketWatch about how the current retirement crisis isn't easy to pin down because as you argue, "The paradoxical situation exists because of how we try to assess the state of retirement finances. We all too often focus on the average retiree, even though this hypothetical average individual doesn't exist. Financial preparation for retirement varies so widely that this average creates more confusion than insight." If someone can't rely on the averages to make personal decisions, what concrete steps can they take to weed out this confusion for their own choices?
MARK HULBERT
Every year Vanguard has a wonderful publication called How America Saves and it has an enormous amount of data. Last I looked, the average 401(k) balance was just over $100,000. Some people will make various assumptions about the market and tell their clients how much they can retire on, based on the amount in their 401(k). It turns out, however, that there is incredible variation around that average. The median 401(k) balance at Vanguard, as opposed to the average 401(k), is a lot lower, which is to say that you have a very few people with incredibly large 401(k)s and many people with small 401(k)s.
Last time I checked, the amount of 401(k)s at Vanguard with less than $10,000 in assets was around 20% to 30%. Of course, some investors have 401(k)s at more than one institution. But Vanguard's database has millions of retirees or potential retirees with 401(k)s. It's going to be relatively representative. The advice given to somebody with a 401(k) of $10,000 is going to be far different than the advice given to someone who has a 401(k) of a million dollars or more. If you look at the average, you miss the important details that make all the difference.
I used an analogy in that column you referred to, of the man who has his feet in the freezer and his head in the oven. On average, he feels fine. That’s something we must remember. We also need to look at how important Social Security is for people who have small 401(k)s. A substantial number of retirees, 90% or more, rely on income from Social Security. I could write a column for retirement finance that looks at all the investment trends and what the future may look like, but for a substantial percentage of people it makes no difference and doesn’t affect their retirement standard of living.
MARTHA SHEDDEN
35% of retirees think they are prepared. One in four are worried they will outlive their money. 59% retire earlier than they planned. 16% work part-time. What are people doing wrong when they handle their Social Security decisions and retirement funds that they still must work part-time? What are some decisions people can make to help them not be in that 16%?
MARK HULBERT
If you can, wait as long as possible before starting to receive Social Security. By waiting, you get a guaranteed real return of 8%. I don't think there's any chance that over the next 10 years, or whatever period you choose, that a 60:40 diversified portfolio is going to produce a guaranteed return of 8% above inflation. That 8% is an incredible return and is guaranteed. The longer you work, the longer you can postpone declaring when you will take Social Security. Sometimes people must declare early due to health issues. One of the heartbreaks with health issues is there is little you can do to help their retirement finances.
Boston College’s Center for Retirement Research is a great resource, and they have several fascinating research papers. One out of the Netherlands noted that people who work longer tend to be healthier. The question is, in what direction does that causality go? Is it that people who are less healthy must retire early? That makes sense, but what if it's the other way around?
They were able to exploit some very interesting statistical properties of their database and found that when you do work longer, you have better health outcomes. Of course, this isn’t a panacea if you already have a terrible disease, but this research is another reason why you might want to work longer. There's another study I wrote a column about a couple years ago. A professor at one of the Ivy League schools looked at the impact of the decision in the late 1950s to allow people to begin collecting Social Security as early as age 62.
It turned out that men who declared at 62 had a significantly higher mortality rate. The author believed that, when men retire early, they lose their purpose in life and this in turn encourages unhealthy behaviors. They might overeat, sit on the sofa and watch TV, smoke, or drink more than they should. These behaviors go way beyond investments. It is not my wheelhouse to talk about these behavioral aspects, but I think these research insights point in the same direction of the virtues of working longer and collecting Social Security at a later age.
This feeds tangentially into the whole F.I.R.E. movement. MarketWatch has run several columns of autobiographical reflections from people who were rich enough to retire by the age of 40. In the majority of these articles that I read, the authors reported that they were bored out of their mind, and they didn’t know what to do. They went back to work, sometimes in the same field, sometimes in another field. Many have looked for and found a new chapter in their life. The idea that we’re going to lie on a beach for 40 to 50 years is just not the case for most people. That is a nice idea for a month or two, but then people get bored and don’t know what to do with themselves. Working longer gives people flexibility and they’re not as reliant on claiming Social Security early.
MARTHA SHEDDEN
Do you feel the Fed is making things better or worse for retirees with the 2020 CARES Act?
MARK HULBERT
I think the answer is both. Our political debate has become so polarized that we can’t admit that it doesn’t matter if it’s a Democrat or Republican in office, the same thing would have happened. If you look back on the financial crisis in 2008, we threw what seemed at the time like an unprecedented amount of money at the economy and turned it around. It looks like we did the same thing in 2020, but it was entirely different political parties that were in power.
If someone has a panic attack, they are more likely to have another panic attack in the future. The same can be said about the economy. In 2020 the economy was in the beginning stages of a full-on panic attack. It’s difficult to put the pieces back together when everything falls apart. It’s better to do anything possible to stop that from happening in the first place. Throwing money at something is not the most efficient way of overcoming it, but if it keeps the economy from having a full panic attack, it might be better than nothing. I think there was a lot more fraud than there should have been, and there could have been more safeguards, but we didn’t have unlimited time to figure that out. If we were in the same position as the monetary and fiscal authorities in Washington, I suspect we would have done the same thing. Now that we are further away from the panic attack, we can see there are both better and worse ways to incentivize a return to a productive economy.
We came out of it extraordinarily well. Thinking back on the dark days of March of 2020, we couldn’t imagine that the stock market would double over the next 18 months. That worries me because that is an extraordinary return, a reflection of the easy money that flooded the economy. But it also created inflated expectations. We’re reducing stocks’ future return of assets by transferring it to the present. By propping up asset prices with unsustainable amounts of easy money, those assets are that much further ahead of their underlying fundamentals, and will have that much harder of a time living up to historical averages. This is on top of interest rates that, with the adjustment for inflation, are significantly negative, which is extraordinary. Both the bond and stock markets are in unprecedented waters.
MARTHA SHEDDEN
Why do you think you are asked about Social Security?
MARK HULBERT
Part of it is biographical. I'm 65, so people look to me more for retirement advice. More specifically, one of the opportunities that became available at MarketWatch was writing for a newsletter called Retirement Weekly. It previously had been written by Robert Powell, who was a giant in the field. I'm reminded repeatedly that the wise man is the man who knows he knows nothing. Social Security is no exception to this. There are numerous variables that we need to take into account when trying to come up with the best solution for a particular retiree. The moment you feel tempted to say, “That’s always the case,” you’ll discover it’s not always the case. The idea that people can learn this on their own is almost impossible.
MARTHA SHEDDEN
I learn new things every day and with every case I have. Like you said, people don't know what they don't know, and they don't know what questions to ask either.
MARK HULBERT
In the grand scheme of things, Social Security is a relatively predictable thing. Still, trying to figure out the optimal solution for claiming Social Security is itself incredibly complicated. Nevertheless, the stock and bond markets are even more unpredictable.
Even more unpredictable still is what helps us lead happy and fulfilled lives in retirement. The Employee Benefits Research Institute recently broke down retirees into five cohorts, according to how many assets they had in retirement. The bottom cohort, the one with the fewest assets and income, reported much lower average satisfaction levels with retirement. The satisfaction levels among the other four cohorts were almost the same, however. Evidently, once you’ve made it out of the lowest cohort, additional money doesn’t buy happiness. Getting out of the lowest cohort is important and in thar regard I recommend supplementing Social Security with an annuity that provides a guarantee. That guarantee creates a calming effect.
MARTHA SHEDDEN
What are the top two or three most important takeaways individuals approaching retirement and claiming Social Security could learn from you?
MARK HULBERT
First, you need to engage a qualified expert to help you with your Social Security decision. I always recommend people consult with somebody who has studied this. Social Security is great because it’s guaranteed income. It will last as long as you live. The number one worry of retirees is outliving their money. Providing some anxiety relief through an annuity is not a bad idea. Unfortunately, annuity rates are a function of where interest rates are. Annuity payout rates are not great right now and you can’t get an annuity payout rate that is indexed to inflation.
People should talk to an expert about their Social Security and more importantly an expert about their annuities because annuities are even more complicated than Social Security. Having that annuity really decreases anxiety even if it means you’re giving up the possibility of making a killing in the next Tesla or GameStop stock. In return, you’re not losing sleep at night over losing too much in your portfolio and outliving your money. Given the EBRI survey results that showed happiness or satisfaction in retirement is uncorrelated with the amount of assets and income people have, people should remember what’s really important in life because many people are more worried about running out of money in retirement than dying early.
MARTHA SHEDDEN
Is there anything that you've learned, discovered, or experienced that would surprise people?
MARK HULBERT
The future is unknowable. We must trust in the future because we can’t control it. One of things we can control is the way we live our lives. It’s the same for retirees, they can’t control everything. In fact, they can control very little financially because we can’t control the markets. There is a certain release and surrender that comes from this recognition, not because you’re giving up but because you recognize you can’t control everything. The problem with that is many retirees spend an enormous amount of time investing in the markets or trying to play the markets. That’s not the way to retirement riches.
The average 401(k) balances at Vanguard have grown over the last decade. It turns out it’s almost a one-to-one correspondence with the markets. There are people who play the market daily and people who buy and hold, but it doesn’t matter much to their retirement standard of living because both of their portfolios grow more or less in lockstep with the markets. If the markets aren’t as robust over the next 10 to 20 years as in the last couple of decades, it doesn’t matter what you do, it’s really going to affect your returns.
One solution is to divide your portfolio into what's referred to as a permanent portfolio and a variable portfolio. This is following the distinction that was made by the late Harry Browne, who was a newsletter editor. He recognized that, most of the time, when we play around with our money, we make things worse. You should take the bulk of your money for your retirement plan and leave it alone-in a so-called permanent portfolio. You can leave the remainder amount in another portfolio of “play money” with which you can speculate, but you should recognize that the odds are overwhelmingly not in your favor. But since the bulk of your assets are in your permanent portfolio, you’re not making your retirement standard of living vulnerable to a big mistake. You would never invest all your money in the lottery and call it your retirement financial plan. Many people are still involved with the markets in a gambling fashion, and at some point, they are going to find the markets catch up with them.
MARTHA SHEDDEN
It's how we react to the circumstances as we move forward into retirement, too. Things are going to happen. They're going to be difficult. Some are going to be wonderful, but many people have anxiety around it. How do you react to those circumstances?
MARK HULBERT
We can look at retirement as a wonderful time in our lives. We must learn to accept what comes along and make the most of it. We should worry about the things we can control. We can’t control the world, but we can control our response to what is going on in it.
MARTHA SHEDDEN
Control what we can. Thank you for sharing your insights.