Finance Stories So Important You Can't Think About Anything Else

"There are questions so important that is it hard to think about anything else."

--Glen Weyl, 2007 Princeton valedictorian address

A few readers have noted that I've made a habit of writing about the abysmal track record of financial pundits. Guilty as charged. But I write about it because I think it's one of the most important financial stories of our time.

Think about it. A pundit bombastically predicts that a market crash is coming. You sell your stocks and sit in cash. Meanwhile, the market gains 20%. The pundit will never be held accountable -- he's still on TV making predictions -- while you are 20% poorer than you should be. The decision to sell was yours alone, but the relationship between you and the pundit is skewed; both of you gain when he's right, but only you lose when he's wrong.

Over the last two weeks, investors have pored over analysts' predictions for 2013. But as a Bloomberg headline summarizes nicely, "Almost All of Wall Street Got 2012 Market Calls Wrong."

It's hard to write too much about bad predictions because, as Glen Weyl might say, it's so important that it's hard to think about anything else.

However, there are a couple of other finance stories that should move to the top of your list. They're so important that they can't be written about too much.

One is that the majority of Americans aren't prepared for retirement.

According to Social Security's actuary tables, a 65-year-old female can now expect to live another 19.9 years. That's almost double the remaining life expectancy of half a century ago. And according to Nielsen Claritas, Americans aged 65 have a median net worth of just $232,000. Meanwhile, Fidelity Investments says the average 65-year-old couple retiring this year will need $240,000 just to cover medical bills during retirement.

Of all Americans, ConvergEx Group says: "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away."

Forget earnings reports, fiscal cliffs, interest rates, or oil prices; the most important financial story of most Americans' lives will be their lack of personal savings and the challenges it will pose as they attempt to retire. It's so important that it should be hard to think about anything else.

Or how about the fact that the majority of professional money-managers underperform their benchmark index?

According to the Vanguard Group, "When removing the effects of survivorship bias, the percentage of funds that underperformed the market [was] 62% for the 10-year period, 67% for the 15-year period, and 72% for the 20-year period."

As Bloomberg reports:

More than 65 percent of mutual funds benchmarked to the S&P 500 trailed the gauge in 2012, according to data compiled by Bloomberg. The 50 stocks in the S&P 500 with the lowest analyst ratings at the end of 2011 posted an average return of 23 percent, outperforming the index by 7 percentage points, the data show.

The question of "What manager can I make the most money with?" is becoming, "Who will lose the least of my money relative to an index fund?"

There has been a shift away from active management and toward indexing in recent years, but investors still hold about $11 trillion in actively managed funds. And according to IBM, global money managers overcharge investors by $300 billion a year for failing to deliver returns above a benchmark index. Consider: Warren Buffett has made $230 billion for himself and his investors over the last 50 years, while the majority of money managers cost their investors that much every nine months.

If you invest with professional money-managers, this, too, is so important that it should be hard to think about anything else.

Most financial news is irrelevant -- even harmful -- to your financial health. But some stories are so momentous that they can't be written about enough.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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Read/Post Comments (17) | Recommend This Article (45)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 15, 2013, at 4:55 PM, kyleleeh wrote:

    One thing that I think is so important I can't think of much else.

    While CEO's complain that politicians don't understand business, Business doesn't seem to understand politics. For example, baby boomers have been very bad about saving for retirement but senior citizens are great at voting, If corporate profits are high and someone has no retirement savings or pension who do you think they will vote for, the candidate that wants to raise the medicare age and cut corporate taxes, or the candidate that wants to tax big business and pay out more social security? If Corporations move all the middle class jobs overseas and replace them with part time minimum wage jobs do you think the displaced worker will stay in favor of free market capitalism or do you think they might decide that protectionism and socialism are the way to go? I think that in their endless pursuit for increased profits and lower overhead businesses are actually digging their own graves politically. This worries me as an investor because it means that corporations may find themselves facing a lot of political headwind as far as profit margins go, I wish they would learn to find a sustainable compromise between labor and capital so that profits and valuations are not so volitile.

  • Report this Comment On January 15, 2013, at 5:32 PM, astuber9 wrote:

    It is a worthy topic to discuss, I think most of us just like to give you grief.

    How about this for a possible future article: with the big shift to index funds that you point out, do you think this will motivate actively managed funds to lower their fees? 100% of my 401k is in an index fund, but I might be willing to pay .5% or so for a good small cap manager. I can assure you I will never pay the 1.5-2% they are charging currently.

  • Report this Comment On January 15, 2013, at 5:58 PM, xetn wrote:

    Morgan: What about all the adviser who sway investors to buy their "stock of the day" that turns into a loser? The adviser off scot free while the investor has lost yet again.

    Perhaps the story should be that investors should make themselves responsible for the due diligence before the make the purchase/sale, and forget the (mostly) overpaid advisers.

  • Report this Comment On January 16, 2013, at 2:00 AM, herky46q wrote:

    Who will end up supporting all of these ill-prepared retirees?

  • Report this Comment On January 16, 2013, at 10:04 AM, astuber9 wrote:

    ^

    Everyone else, of course. That being said they will get smaller SS checks in the future. I think people that say SS will not be around in 50 years are crazy, but the payouts will start later (67+) and be smaller.

  • Report this Comment On January 16, 2013, at 10:36 AM, DJDynamicNC wrote:

    "Perhaps the story should be that investors should make themselves responsible for the due diligence before the make the purchase/sale, and forget the (mostly) overpaid advisers."

    Agreed. It's not worth listening to those folks. At the end of the day, all you can do is rely on yourself - though it's nice to have a thoughtful community with whom you can discuss your ideas, like this site!

    It would be nice to see if the people who are making these predictions actually go out and follow their own advice. I bet many of them don't.

  • Report this Comment On January 16, 2013, at 11:21 AM, famiglia112 wrote:

    "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away."

    This is where I like to point out that the system is set up to incentivize consuming, so it shouldn't be too surprising that no one is saving- it's actually irrational to do so. If the country were to embrace a system, say, like the FairTax, or another consumption-based tax, while abolishing the income tax, I think in time you would absolutely see more people saving for their own retirements. Whether or not there's a single politician in DC that actually wants people to save for themselves is an argument for another day...

  • Report this Comment On January 16, 2013, at 12:08 PM, DJDynamicNC wrote:

    "Everyone else, of course. That being said they will get smaller SS checks in the future. I think people that say SS will not be around in 50 years are crazy, but the payouts will start later (67+) and be smaller."

    I'd rather just lift the payroll tax cap and expand immigration to increase the pool of younger workers. These are simple steps that would have a very positive impact on quality of life for a large number of human beings.

    Social Security has made a tremendously positive difference in addressing poverty, particularly among elderly people, and I am more than happy to pay my share for such a worthwhile goal with such benefit to society.

  • Report this Comment On January 16, 2013, at 3:27 PM, fool3090 wrote:

    The thing that I find so frustrating is that responsible savers and responsible spenders are punished for being prudent. Interest rates are gallingly low, so a savings account yields zilch. Same with T-bills. Prudent spenders didn't go out and purchase McMansion. But there's a bailout program (a failure at that) for buyers who were chasing the housing bubble. The banks get rewarded for bad behavior. Again. And again. It makes me nuts. It's taken me 20 years of savings to have an on-track retirement account. I have another 15 to go. Guess who is going to pay for the idiots who only have 25K socked away? Can you say Means Testing? Sorry for the rant.

  • Report this Comment On January 16, 2013, at 6:21 PM, Darwood11 wrote:

    Of course the system is set up to incentivize consuming. That's a natural consequence of an economy that runs on the consumer. Back in the 1990's when oil was going for about $20 a bbl, there were some real opportunities. The politicians pumped the "service economy" instead.

    The politicians will deal with SS problems by taxing the recipients. This has the politically desirable effect of moving SS dollars into general revenue, where the pols can spend it on their favorite pork, or what they consider to be better perks or social programs. These of course get them votes from the indentured.

    I am sad to say that "means testing" will be a natural consequence. The extension of all of the hyperbole about "taxing the rich" will move from annual income to wealth.

    Those of us who save and are prudent in our investing and our lifestyle (as in living below our means) will pay for the rest. The truly rich, who are well connected and so on will escape.

    However, at the end of the day we are each responsible for our financial well being. It's a choice and I choose to spend less, save more and invest with prudence. That's to be expected if we have critical thinking skills. I also think that I'd rather be the master of my destiny and pay those taxes, no matter how unpalatable, than wait for some politician to award me a small stipend and completely control my financial life.

  • Report this Comment On January 16, 2013, at 8:42 PM, mtprx wrote:

    The pundits don't have to be right, they just have to get people to listen to what they are selling. Everyone should look at it this way: If the person shouting the loudest about an investment isn't invested in that stock, why listen at all. See P.T. Barnum for the truest definition of this definitive observation. Your hand in your pocket making your decisions.

  • Report this Comment On January 17, 2013, at 2:15 PM, seattle1115 wrote:

    Remember Jim Cramer on The Daily Show? Remember how he was publicly shamed into admitting that he was essentially a grifter? Remember how he promised at the end of that interview that he, personally, was going to turn over a new leaf? And how did that turn out?

    Remember, the product that pundits sell isn't wisdom, or knowledge, or insight, or experience. The product that pundits sell is eyeballs, and their customer base consists of advertisers. As long as we keep watching or reading, advertisers will continue to buy space in the hopes of gaining visibility, and the system is working perfectly from the point of view of the pundits.

  • Report this Comment On January 18, 2013, at 2:10 AM, djkumquat wrote:

    good piece and great comments. cheers!

  • Report this Comment On January 18, 2013, at 8:13 PM, ChrisBern wrote:

    fool3090 nailed it. It can be frustrating to be a responsible saver/investor in the U.S. because the policies are slanted against us.

    As to the author's point about retirees not saving enough money, it wouldn't surprise me in the least to see gov't promises to those underfunded retirees increase in the future simply because they're underfunded. The gov't will see elderly people struggling and will feel the need to help. The problem with constant bailouts is moral hazard, and this will be no exception.

  • Report this Comment On January 19, 2013, at 11:31 AM, bonsaibean wrote:

    Until we are ready as a society, to allow people to TRULY fail, we will continue down this same basic path. We just can't bear to see someone suffer, no matter if they brought it on themselves. Personally, I'm all for natural selection, all the way through to death. If you continue to fight that natural order, you're looking for trouble.

  • Report this Comment On January 20, 2013, at 5:37 PM, TheRealRacc wrote:

    Any solution to this problem will stem from "education".

    Add basic financial literacy, basic long-term financial concepts, and basic politics to our school systems. Elementary school? Keep it very basic. Middle-schools and high-schools...mandatory curriculum.

    I find very few 20-something-year-olds who can engage in a meaningful discussion about the economy, stocks, or a particular industry. It is even more difficult to convince one of these people that they should be investing.

    The ignorance among the masses has reached new highs. This can only be curbed by conscious and willful effort into understanding truths. Problem is, adults in the society that I'm familiar with, do not want to waste time doing this. So we must take the decision out of the adult hands, and force it upon the children. Second-nature instincts never disappear.

  • Report this Comment On January 22, 2013, at 8:34 AM, Peak2Trough wrote:

    Great article, Morgan, and I completely agree. Anyone who believes the financial soothsayers are any more credible than circus fortune tellers needs to reexamine their outlook.

    For the interested Harry Browne wrote about this extensively in his book "Why the Best-Laid Investment Plans Usually Go Wrong." It's an older book, but Harry subscribed to dozens of newsletters for years and then later went back to their predictions and noted the results. It wasn't pretty.

    An equally compelling story, however, is why the Motley Fool doesn't discuss or publish risk-adjusted returns. As a former subscriber, all I ever saw published was the return of a given newsletter, never the volatility, standard deviation, or other measure of risk for any of the portfolios. Why is that?

    A stated return by itself is meaningless outside the context of the risk one took to earn it.

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