Steve Forbes Interview: Experts On Building A Retirement-Ready Portfolio?(2) ~ MAKE MONEY BLOG$

Ken Fisher (President, Fisher Investments)

Stocks For Retirees

Forbes: You also make the point on demographics — and you get into farmers on this — that, age 60, you think, “Boy, I better go short term, retirement looms.” You make the point that most people are probably going to live another 20 or 30 years. You better think equities.

Fisher: You know, when I was young, like a lot of people, about 25, I bought a term life insurance policy to protect my family. I kept paying it, and then I stopped paying it after I made enough money that I didn’t really think I needed it anymore, because it wasn’t significant. It just sat there in a drawer in my home desk.

And after I got to be about 50, I pulled it out, and it had all the stuff that went with it. And I looked at the actuarial tables, and then I got current actuarial tables. And the issue is, if you get to be 50, how long should you live? When I was 25, if I got to be 50, here’s how long I’d live. When I got to be 50, looking at the then current actuarial tables, seven more years had been added to my life just by living 25 years, tied to us living longer from improved medicine, etc. etc. etc. When you and I were young, there was no such thing as senior sports.

When you and I were young, you didn’t find old people out jogging. When pensions were started, people worked until they were 65, and they died at 70 — which is one way to make the pensions work. The fact of the matter is, for example — and people find this perverse, but it’s true — tobacco has always been very good for pension plans, because it kills people at about 70 and it makes the pension plan work.

It’s terrible for the people, but you get my point. Which is: What we’re moving toward is steadily increasing time horizons, and everything that I understand about what’s going on in medical science right now says that’s going to keep going for a long time. In fact, there’s a process in unraveling the human genome that’s actually expanding at a rate, according to the top people in genetics at Johns Hopkins Med, that’s actually faster than Moore’s Law. It’s operating at about six times the rate of Moore’s Law, and it’s one of the most powerful features that people don’t understand today.

That process will create what’s ultimately going to be thought of as individualized medicine, tailored to your genes, which will extend life horizons even further. So, the person that’s 65 today that invests like they have a short time horizon, may well end up living to be 100, because their time horizon, their life expectancy, is going to keep increasing the longer they live. That process means you’ve got a long time horizon. If you put half your portfolio into bonds right now, you almost certainly guarantee that late in life you end up poorer than you would be otherwise

Todd Morgan (Senior Managing Director, Bel Air Investment Advisors)

Stars Wising Up?

Forbes: Before we get to that, in terms of celebrities, do you see from looking around your world that you think, are celebrities wising up to the fact all this money coming in ain’t going to last forever and they’ve got to be more prudent? Or is it still 85% are just going to end up ten years from now wondering, “Where did it all go?” And then a corollary question to that, when you go over what you really need as income, do you try to gently advise them, “You don’t need a retinue of 75 people to see if your hair is combed right?”

Morgan: I don’t go that far, but I go close. To answer your questions, I think it’s yes and yes. So, let me back up one second. I think that these people do realize now that the industry has changed and A actors are now getting paid B prices. Bs are getting Cs. And Cs are not getting paid. So, they know it.

Forbes: So, the change in the structural world has woken them up in a way that Vegas once had.

Morgan: So, then you ask, “What about saving money?” Well, a number of them haven’t saved a lot of money. And they thought that it lasted forever. So, the last few years, they realized that the income is not there. So, for a number of people in that industry, it’s problematic. And they don’t have the reserves that they should have to keep it going. We also see a number of these people reducing the number of homes they have. Entertainment people love homes. And they’ve made money on them

Forbes: They think it’s an investment.

Morgan: Well said. They really think it’s an investment. So I try to tell them, “You know, you don’t get a return on your home.”

Forbes: Like a savings bank, yeah.

Morgan: Or a commercial piece of real estate. So that’s an issue. And I think it’s going to –this isn’t for our clients so much, but the general entertainment world — I think it’s going to get worse because the business doesn’t look like it’s going to turn around any time soon. And they’re over-weight in homes. The average American of their net worth has 25, 30% invested in homes. In Southern California, maybe Northern, also, it’s crazy; sometimes it’s 50, 60, 70% of their net worth are in these homes.

You’re a smart guy. You can do the math. You can’t last like that forever, especially if you don’t have the income coming in. So it’s going to be a problem over the next few years.

Jim Reynolds (CEO, Loop Capital)

Pension Problems

Forbes: When this, of course, gets to pensions, in which Pew came out the other day with horrific numbers on funded liabilities in 31 states. You know about the budgets being in the red. Illinois is the worst in the country right now.

Reynolds: That’s right.

Forbes: And yet, you said Illinois, California, they’re not going to default.

Reynolds: No. And the market has absolutely been responding in that way. The spreads on the bonds on Illinois and California have actually been tightening, meaning yields going down relative to the risk-free assets, which is treasuries. When you look at actuarial liabilities on a pension plan, it’s not like the pension plan is going to have to pay those tomorrow.

You make assumptions about the life of the pension plan, the plan recipients, etc. When we looked out at the options that the pension plans had at their disposal, if they had the will to do so — and many are showing that will — those problems could be fixed.

We’ve seen in Illinois the average length before retirement went from I think 62 to 67. They’ve recalculated the ways that they come to what your pension is — instead of your highest year’s earnings it’s an average of three or five years, and the length of time that you have to work in the position before requirement before retiring.

So there are things. And now pension plans are looking at promised benefits to existing workers to make adjustments. And so when you looked at the weapons that they had in their arsenal, all of these things were fixable. But where the doubt was I think, was whether the public really believed that the politicians would actually fix it. And they’re starting to do so.

Michael Mauboussin (Chief Investment Officer, Legg Mason)

The Coffee Can Approach

Forbes: In one of your papers, you cite the story of a fellow who managed his own money and also managing his wife’s money. With his wife’s money, he took the very cautious approach of following the recommendations of the firm, and with him, he just, in effect, as you put it, threw it in the coffee can and bought something, just forgot about it. Turns out, the coffee can approach vastly exceeded the very sensible approach of buy, sell, follow recommendations. Again, explain how that unfolds.

Mauboussin: Well, yeah, isn’t that just a wonderful story? People now have been very down on the idea of buy and hold, especially since we’ve had roughly a decade of flat stock price performance. But it’s really not buy and hold that matters, it’s buy cheap and hold.

And I think that story really illustrates that point. And the fellow you’re talking about is Bob Kirby, who is one of the founders of Capital Guardian out in California. And to your point, he was running the wife’s portfolio and he was following all the firm’s advice for buying and selling.

So he was very meticulous in making sure that they did all the right things. It turns out he was placing the orders through the husband, who was then every buyer recommendation, he’d take $5,000, buy the stock, and chuck the stock certificate into a vault, never paid any attention to it. And, unfortunately, the husband passes away and the wife says we’re going to converge this and when Bob looked at the husband’s account, he was both appalled and he was shocked.

He was appalled, he was shocked, first, because he had followed all the recommendations only on the buy side, but he was appalled to see that that account had risen to much greater value than his wife’s. So basically doing nothing, paying no attention to it, it had built a lot more value. And it turns out there was one company in particular that did extremely well in there

Forbes: Xerox.

Mauboussin: A company called Xerox, which in the day was a really hot stock. And so the idea is not to say, not recommending that people go out and find the next Apple or Google or whatever it is, but rather to say that buying things cheap and just holding them and, by the way, that’s classicWarren Buffett, right? He’s got these great lines about sitting around and doing nothing is kind of our investment strategy. If we buy them right, the businesses create value, over time, they’ll compound and create a lot of wealth. So I think that is the major message is often we make moves to try to improve our stead, and in fact, we detract from our position.

Forbes: So what’s an investor to do? You are, in effect, saying indexing, even though indexing has its problems because it rides with the winners and underplays the losers.

Mauboussin: Yeah, so I would say that, right, I mean, and much of this is idiosyncratic. So different people have to do different things, but by and large, people should certainly save as much as they possibly can, and they should have some percentage of it in the stock market. I think indexing does make a lot of sense, basic indexing, and obviously diversified now, increasingly globally as well. And that, for most people, will be fine. But, again, the only way to generate returns above the benchmark is to have active management.

And the only way to do that is to find managers who themselves are making very good decisions that over time will play out well. So for those individuals that are motivated, I would try to use that template of saying are they making good analytical decisions, are they making good behavioral decisions, and is their organization conducive to them doing well over time?

And if those three positions are, those things click into place, then you probably allocate some percentage of your portfolio to those kinds of folks. It’s just like saying, hey, I’m going to bankroll a guy playing poker, he or she may not win every single night, but if their process is good, over time, they should do fine.

Forbes: Now, what’s an older investor to do? Take somebody who’s 60. What would you recommend? I mean, with all the caveats, you know, depending on the person, blah, blah, blah, blah but the tendency for older investors is to say go more short term, yet we now know, given a little luck, probably going to be around another 20, 25 years.

Mauboussin: Yeah, I heard once Jim Grant, have you heard him talk about, he said, “Roll back the calendar 30 years, and that’s your best advice, go back to being 30.” It’s a very difficult spot, I think, for many investors, older investors.

I guess one of the things I would probably look to is the equity markets, but in particular, high-dividend-yielding stocks. I think that’s one part of the market. The market itself doesn’t seem to have onerous valuations, certainly in my view, and high-dividend-paying stocks may be one of the ways to generate that income, have relative safety. Of course the market always has its vagaries, but that might be one strategy that would make sense. It’s very, very difficult, certainly, with fixed income instruments.

The yields that we’re seeing today with the 10-year Treasury Note below 10%, below 3%, pardon me, there’s just not a lot of yield out there for folks that are looking for shorter time horizons.

source: forbes.com
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