Jason Zweig is one of America’s top financial journalists. He may be “the best” when the subject demands a psychological slant. He proved it several years ago. I couldn’t resist reviewing one of his books. Here’s my opening lines:
Are you an “intelligent investor?” Maybe not. “Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is, or miserable just because he thinks you should be?” “Of course not,” says Jason Zweig in his commentaries to the updated version of Benjamin Graham’s The Intelligent Investor. “But when it comes to their financial lives, millions of people let the stock market tell them how to feel and what to do, despite the obvious fact that, from time to time it can get nuttier than a fruitcake.”
Today we’re not much different, arguably we’re worse off psychologically. We sure aren’t “intelligent investors.” We’re still letting that “certifiable lunatic,” as Graham affectionately called the stock market, run our lives, even though he’s “nuttier that a fruitcake!” How else can we explain the fact that Wall Street lost over 20% of our money the past decade and still expect to gain 20% in 2010. We should be worried that Wall Street will lose even more of our hard-earned money the next decade, as I wrote recently on MarketWatch: “8 Reasons Wall Street loses another 20% in this decade: Warning, you can’t get back to even, cannot win Wall Street’s ‘loser’s game’.” Here’s Zweig’s latest on the same point in his Wall Street Journal column, The Intelligent Investor, titled, “Why Many Investors Keep Fooling Themselves.”
What are we smoking, and when will we stop? A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years. … We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points. So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs.
Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%. All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%. The faith in fancifully high returns isn’t just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that can’t last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement …
I asked several investing experts what guaranteed net-net-net return they would accept to swap out their own assets. William Bernstein of Efficient Frontier Advisors would take 4%. Laurence Siegel, a consultant and former head of investment research at the Ford Foundation: 3%. John C. Bogle, founder of the Vanguard Group of mutual funds: 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%. …
All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you will take it, right now, upfront. In fact, tell him you will take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You have just offered him the functional equivalent of what Wall Street calls a total-return swap. Unless he is a fool or a crook, he probably will decline your offer. If he is honest, he should admit that he can’t get sufficient returns to honor the swap.
And still it’s getting worse. Year after year we still turn our portfolios, our investment decisions, our retirement and our family’s future over to that “certifiable lunatic,” we let him run our lives, even though he’s “nuttier that a fruitcake!” This is no “harmless fairytale,” you can’t trust “him.” You’re in denial. Stop making a fool of yourself.