The most dangerous financial shift that has occurred in the United States in the past thirty years has been the shift from the pension system to one dominated by 401(k)’s.
You’re going to get bad results when you expect the average guy on the street to (1) save appropriately, and (2) select the appropriate investments so that he can build long-term wealth for decades on end.
According to CNN: http://www.money.cnn.com/2014/02/13/retirement/401k-balances/ , the average 401(k) account for someone approaching his or her 65th birthday is $165,200. Even if you reach the conclusion that people should bear the personal responsibility to prepare for their own retirements, you still have to acknowledge that the society-wide result is going to carry a lot of unpleasant effects in terms of people unprepared to take care of themselves in their later years (at this point, it would become a political question of whether you’d find that permissive).
There’s a number of reasons why people find themselves on that situation. Money remains a taboo subject or something of disinterest for most high school and college students, and robust financial literacy isn’t occurring on a society-wide basis because parents don’t want to talk about it, schools don’t teach it, and it’s not exactly something that the high school quarterback is going to be talking to the cheerleader about on a Saturday night.
And even if you do decide to make it a priority to save 15% (or whatever amount) of each paycheck that you receive, then you’re immediately swamped with trying to find the “right” investment. Do you buy stocks? Bonds? Mutual funds? Which one? Should you put your money with that guy in Omaha? What about my friends who say I should buy Apple stock? And what about that income investor website with a guy that keeps saying “Buying Coca-Cola” stock?
I was thinking about these things today when I was eating lunch and saw this fifty-second commercial for Lear Capital on the Fox News Business Channel.
I was instantly put off.
There was just something terribly predatory about it. I pictured in my mind a young professional, not terribly familiar with stocks, getting swayed by the scare tactics of the Fed printing $75 billion per month. I pictured an elderly couple worried about a $300,000 nest egg after the commercial proclaims that we are living through one of the worst market bubbles in history.
It’s all about scaring and preying to create business. For commercials like that, there needs to be a countervailing force saying, “If The Fed stops intervening, stock prices might decline up to 10% if all else remains equal. But all else is not equal. Corporate profits, buybacks, and dividends are growing. For example, Johnson & Johnson’s profits have increased from $5.00 at the start of 2012 to $5.85 (estimated) by the end of 2014. Over the course of three years, that 17% profit growth is going to overcome any fluctuation caused by the termination of Fed Intervention.
That’s the problem with most scare tactics—that take something that seems plausible, and (1) exaggerate it, while (2) simultaneously ignoring any countervailing facts. The ad goes on to say that we’re in “the biggest bubble in history.” That’s absurdly false—the current markets aren’t even close to the dotcom bubble of fifteen years ago. Around 2000, most large-cap stocks were trading in the 40-50x profits range. You reach bubble status when large-cap, mature (non-cyclicals) firms trade at over 30x earnings. Right now, most of them are trading around 20x profits. We would need the price of stocks to increase 33% in excess of profit growth to reach bubble territory, and we’d need stocks to climb 50% this year in excess of profit growth to be on par roughly with what happened fifteen years ago.
That’s why I don’t like that Lear Capital commercial—it seems designed to appeal to fear and the primal instincts of those that don’t know any better. It provides scary, isolated supposed facts aimed at using fear to drive customers to their door. You’re a net negative for the civilization when you’re scaring people with emotionally provocative talking points to get them to give you money. It’s an unabashed attempt at selling fear to those who don’t know any better.
Originally posted 2014-03-10 22:04:26.
The biggest problem I have noticed for young(er) people than me is the idea of saving for the future. They either say ‘I want my money now’ which is another way of saying, my present self knows better than my future self. Or they cannot conceive of themselves being 65 years old and needing money. ‘That is so far away’ or ‘I’ll have everything figured out by then’. I’ve even heard ‘I won’t live that long’. Really? Your parents are just hitting 70 and you don’t think you’ll live that long?
So far, only one of my 3 kids have listen to me about opening a Roth IRA right when they started work, that was with a 50% matching incentive from me. At almost 25 years he is on his way to a $25k balance. Which is $25k more than me at that age. I tell him if he keeps contributing regularly and never touches it for emergencies he’s well on his way to >1m by 65.
I think people should be at least be taught about index funds and inflation-protected treasuries. In fact, it is so easy to open an IRA or Treasury Direct account now that the tools to get going with saving is not really that hard. I can some people not comfortable with stocks, but heck, at least buy inflation-protected bonds if one is scared of future inflation.
I do have to give, many company and civil service pensions don’t do specifically well. The problem is that many of these pension funds buy rubbish – instead of putting money into “reasonable things” (good company stocks or high-grade bonds), they put money in derivatives, high-yield debt, hedge funds and private equities. This leads to pensions getting underfunded (some muni government even don’t commit enough money to the pension pots, and that makes it worse!).
That’s what happens when you watch Fox, Tim 😉 People are uninformed, so I guess in a sense the commercial IS predatory, but what commercials aren’t? Effective marketing often utilizes fear to prompt action, whether you’re buying insurance or a vehicle or diapers. The problem IMO is the lack of financial education overall in this country. Those who have taken the time to educate themselves can see that this commercial is a scam. Looking forward to a new article from you.
For the reason that the admin of this site is working, no uncertainty very quickly it will be renowned, due to its quality contents.