Jonathan Clements has written The Wall Street Journal’s ($) Getting Going personal finance column since October 1994. In this week’s column, he reflects on ten years of providing personal finance advice, and his views are quite interesting and somewhat surprising for a columnist of a newspaper that advocates investment:
The fact is, over the decade I have written this column, my optimism has taken a beating. Yes, I still believe it is possible for ordinary investors to make decent money on Wall Street. But it has become increasingly clear to me that the odds are stacked against us.
First, Mr. Clements notes that gains in stock prices are almost certainly going to slow over the next several decades:
[T]he collapse in stock prices has made me look harder at historic market returns — and I don’t like what I see. According to Chicago’s Ibbotson Associates, the Standard & Poor’s 500-stock index has clocked an impressive 10.4% a year since 1925.
A significant part of that gain, however, came from both rich dividend yields and rising price/earnings multiples. Today, with dividend yields so low and P/E ratios so high, long-run returns will almost certainly be lower — even assuming robust economic growth.
The nosebleed valuations are especially worrisome given the aging of the U.S., Europe and Japan. In 30 years, 20% of the U.S. population will be age 65 or older, up from 12% today. With fewer workers per retiree and massive government spending needed for Social Security and Medicare, we are going to face some grim financial choices.
Thanks to their younger population, developing nations should post faster economic growth. That is why I am a big fan of emerging-market stock funds. . . These funds, however, aren’t a sure thing, in part because the countries involved don’t offer the political stability and commitment to property rights that we enjoy in the U.S.
Indeed, when the costs attributable to investing are assessed, the potential gains look even slimmer:
If the markets’ raw results are a tad slim in the decades ahead, the gains may all but disappear after figuring in investment costs, taxes and inflation.
Suppose you own a balanced portfolio of stocks and bonds that scores 6% a year. Knock off two percentage points for investment costs, and you will be down to 4%. Lose 25% to taxes, and that 4% will become 3%. Wouldn’t mind earning 3%? Problem is, that 3% could easily be devoured by inflation, leaving you with no real return.
Faced with such potentially meager results, the solutions are obvious enough, and I find myself advocating them ever more stridently. Want to make your investment portfolio grow? You need to save like crazy, make the most of tax-sheltered retirement accounts, trade sparingly and favor low-expense funds, especially market-tracking index funds.
After ten years of reviewing the travails of the individual investor, Mr. Clements is no fan of the Bush Administration’s proposal to privatize Social Security:
Unfortunately, during the past decade, my confidence in the investment acumen of ordinary investors has been shaken. I have come across too many serial blunderers, folks who jumped from technology stocks in the late 1990s, to bonds in the bear market, to real-estate investment trusts in 2004, always buying after the big money has already been made.
These investors have neither the education nor the emotional fortitude to invest sensibly. That is one of the reasons I believe replacing traditional company pension plans with 401(k) plans has been a mistake. Similarly, I fear that the privatization of Social Security will be a disaster unless it is accompanied by a slew of safeguards.
And perhaps most surprisingly, Mr. Clements levels his harshest criticism for the industry that makes its living off of advising people on how to invest:
Of course, wayward investors could be straightened out with sound investment advice. But that isn’t exactly a safe bet.
Over the years, I have met some fine brokers and financial planners. I have also, however, heard too many horror stories. As e-mail has spread, journalists have become more accessible to readers — and that means I get a steady stream of e-mails from aggrieved investors who were taken to the cleaners by unscrupulous advisers.
To make matters worse, Wall Street appears to have scant interest in fixing this mess. In theory, we should be entering a golden age of investment advice, with brokers and planners helping legions of aging baby boomers to manage their burgeoning nest eggs.
Yet rather than helping investors, Wall Street seems more intent on profiting from them. Brokerage firms could refuse to sell bad investment products and ruthlessly weed out rotten brokers. Instead, they appear content to let their brokers loose on the unsuspecting public. What about the legal problems that inevitably follow? That, it seems, is viewed as simply the price of doing business.