Generally, summertime gives people plenty of opportunities to dive into a good book, whether they come while we're lazing on the beach, or curled up at home with the air conditioner blasting.
In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Morgan Housel, who shares something he calls an anti-reading list (along with an actual book recommendation). In addition, Southwick surveys the Motley Fool office to see what her co-workers are doing aside from reading this summer.
Finally, the team also tackles a question about the difficulty some retirees have in transitioning from a steady paycheck to relying on other forms of income. Is buying an annuity a good decision? The Answers squad lets you know.
A full transcript follows the video.
This podcast was recorded on July 19, 2016.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. And he's also the advisor on Motley Fool's Rule Your Retirement newsletter. I never get tired of saying this.
Robert Brokamp: Hi, Alison.
Alison: Hi, Bro. On today's episode of Motley Fool Answers, it's our anti-summer reading list. Morgan Housel joins us to talk about what he doesn't read. I'll also travel around the office to find out what everyone is doing other than curling up with a good book. We'll also answer your questions about where to find predictable income in retirement. All that, and more, on this week's episode of Motley Fool Answers.
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Alison: It's time for Answers Answers, and today's question comes from Sally. Sally writes: "I've done some retirement planning, and the one thing that seems most troubling is the instability of income. My advisor suggested that I could use an annuity to smooth out the bumps. I'd always heard that annuities were akin to four-letter words, though if Robert says he's considering them, I'm feeling they can't be too bad. So is there another product or planning tool out there to smooth out the volatility that comes with being in the market?"
Robert: Well, Sally, it's a really interesting question. It is very difficult for people who were working and getting that steady paycheck to then go into retirement, where basically a good part of your income is reliant on your portfolio, which changes value each and every day. It can be a little disconcerting.
Alison: Right.
Robert: And so as Sally has obviously heard, I actually sang the praises of annuities in a previous episode.
Alison: Some.
Robert: Some -- and that's what I want to make clear here. There are lot of different types of annuities, and I was talking about the classic annuity where you hand over to an insurance company a lump sum, like $100,000, and then they give you maybe $6,000 a year for the rest of your life. The good thing about that is, that $6,000 is going to come in no matter what happens to the stock market or the bond market. You can't outlive it, so if you live until your 90s or 100s, you can't outlive the money, so that's great about that. But the downside of that is, if you hand over that $100,000 and then you die the next day, they get to keep that $100,000.
But what's good about that is when you add it to your Social Security, which is also similar -- you have that reliable income coming in that lasts as long as you do -- you have this stable bedrock of income. In the previous episode, I brought up that when you look at surveys of retirees, the retirees that are the happiest are the retirees that have the most guaranteed income.
So an annuity is worth considering, but the other thing that you should do when you are in retirement is create what we call an "income cushion." This is actually a term created by Dave Braze, who back when I joined the Fool in 1999 was writing the Weekly Retiree Report, which is something we don't write anymore.
Alison: That sounds boring.
Robert: Oh, it was good stuff. And one of my first jobs at the Fool was to edit it.
Alison: Ugh!
Robert: Dave was a financial planner. He was in the Army for 25 years and he wrote this article about how he does his income cushion. Basically, he analyzes how much he's going to spend in his retirement over the next five years, backs out what he's going to get from Social Security, backs out what he's going to get from his pension from being in the Army for 25 years, and that amount, he puts in cash or short-term bonds. So his next five years' worth of income, or the money he needs to cover his expenses, is safe.
That's pretty predictable, so if the market goes down, he's got what he calls his income cushion. You replenish it every year, unless the stock market goes down. Then you put it off for a year, or two, or three, because generally speaking, over most five-year periods, the market has a positive return. That's another way to do it.
Still, you'd have to invest in the stock market because otherwise, your retirement portfolio may not keep up with inflation. So I understand being uncomfortable with the volatility, but it's important to remember that the returns from the stock market come from two components: the ups and downs of the prices, and the dividends.
And the dividend portion is much more reliable. Since 1960, the dividends paid by companies in the S&P 500 went down [only six times]. One of the worst times was when we went through the Great Recession. In the Great Recession, the S&P 500 itself dropped more than 50%. The dividends declined 20%, and they recovered in about two years to where they are now, paying out almost twice as much as they were back in 2007.
So as long as you have a portfolio of Social Security (maximize it as much as possible), an income cushion (so the money you need in the next few years out of the stock market), maybe an annuity, and a good, diversified portfolio of dividend-paying stocks, [you have a] nice, solid foundation of predictable income, and I think you'll be OK in retirement with that.
Alison: There you go, Sally.
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"Ad: This podcast is sponsored by Harrys.com"
Alison: And Bro, you actually got to try it out. What did you think?
Robert: I've been married for almost 17 years, now, and I dated my wife for a few years before that. And this was the first time that she ever said anything about a shave.
Alison: Really? Did you prompt her, though? Were you like, "So, what do you think?"
Robert: No. I mean, she knew I had it. I am a once-a-week shaver, so if you ever see our video, you can tell I'm usually a grizzly kind of guy. And it's usually with an electric razor, so she's used to a pretty grizzled face to begin with. But I do shave every once in a while, and she did not know that I had just shaved, so that when she had facial contact with me ...
Alison: [Laughs] Why do you make that sound so gross?
Robert: Because it probably is. I mean, have you had facial contact with me? It's probably not very pleasant.
Alison: Why can't you just say when she gave you a smooch, or something sweet like that? Ugh.
Robert: She was taken quite aback, so she was very ...
Alison: In a good way.
Robert: In a good way, she was ...
Alison: Or at least not because of your shave.
Robert: She was very pleased.
Alison: Oh, yay! So if you would like your wife to be taken aback in a good way ...
Robert: Your own wife, not mine, thank you.
Alison: Yes. You can go to Harrys.com right now (that's H-A-R-R-Y-S.com). You can enter the code FOOL at checkout, and that will get you $5 off your first purchase.
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Alison: Here at The Motley Fool we're always telling you what to read, and I swear, Bro does not get a kickback from the publisher every time he mentions The Millionaire Next Door.
Robert: But I think it's a great idea, hint, hint.
Alison: We'll gladly take it. Well, Morgan Housel, behavioral finance expert at the Fool, is here to talk about what you shouldn't be reading, and it's not like a list of books or blogs that you really hate, right Morgan?
Morgan Housel: No, but I have those, if you want them. No, I don't, actually.
Alison: No, this is the kind of content in your anti-reading list that can be found anywhere. So thanks for joining us ...
Morgan: Thanks.
Alison: ... and let's get into the list. The first item on your anti-reading list is political opinions disguised as investing analysis.
Morgan: Yeah, things that I will try to stay as far away as I can. This happens a lot, because investing has a lot to do with economics, and economics has a lot to do with politics, so they're all kind of tightly woven to each other, and it gets so dangerous whenever you are mixing the two -- whenever you are mixing your investments with politics.
The center of politics -- the goal of politics -- is winning the next election, whereas the goal of investing is owning real companies that are going to produce profits and holding them for a number of years to fund your own retirement. They're two just totally different things.
And there's also few things that get people as emotional, and as biased, and as stubborn as politics, whereas the traits you need to be a successful investor are to be open-minded, and levelheaded, and even-keeled.
So it's rare that you will see a successful investor that has based their investing decisions off of politics. When you hear people say, "If X wins the election, here's what you should invest in," I think those kind of things are really dangerous. It implicitly says that politics are what's going to be driving the stock market over the long term. I really don't think there's much evidence that that's the case.
Not to make any political points here, because I'll give both sides of this. When President Bush won the election in 2000, a lot of people said he's going to have a big tax cut. That's going to be good for consumer spending so buy airlines stocks, because people are going to be spending more money. Going on more vacations. That's going to help airlines.
And over the next five years, almost every major airline went bankrupt. It didn't have anything to do with Bush. It's this assumption that if A, then B. And a lot of them make sense, but it doesn't play out that way.
And then in 2008, when President Obama won, it was, he's going to be really bad for big oil, so buy green energy companies (solar and wind). And what happened over the next five years is that a lot of those solar companies virtually went out of business. Stocks were down 95%.
And again, that doesn't have anything to do, necessarily, with the president. It's just what industries are going to do are often so detached from what any single president has influence over. But even with politics as a whole and the influence of it — things are going to play out a lot differently than you will see just from politics alone.
Alison: It's funny that whenever you watch a political ad, whatever [issue] they're fighting over is always going to cost jobs and send the economy in a downward spiral.
Morgan: Of course.
Alison: It's always going to end up with people getting evicted from their homes, no matter what the [issue] is. You really have to do research to be like, "What is this commercial telling me?" And we live in D.C., so we are constantly pounded with these commercials. There's a farmer, and he's crying because of some bill that I need to go vote against. I don't know what's going on, but I don't want to make the farmer cry!
Morgan: The other big one in 2008 was that President Obama was going to pass a bunch of financial regulations. That's going to be terrible for banks, so stay away from bank stocks. It just happens that bank stocks, since he was first sworn into office, have done extraordinarily well. And not necessarily because of anything he did. It's just because the banking sector happened to be bottoming out ...
Alison: It would have been hard for it to do much worse.
Morgan: So a lot of times the narrative behind how you think politics are going to influence sectors in the stock market is totally different from how it actually plays out in reality.
Alison: The second item on your anti-reading list is analysis with time horizons that are far different from yours.
Morgan: Yes, a lot of times, especially in the media, it's hard for journalists, pundits, and analysts to get around this, but you don't know who your reader or your viewer is. Are they 20 years old or are they 70 years old? Those people have totally different objectives, but as a pundit or an analyst, you're kind of speaking in one time frame.
I always try to make a big effort, when I'm reading something, to say, "This analysis that you're giving me, or this forecast that you're giving me ...what time horizon are you looking at?" One of the things I mentioned in the article was, I pay no attention to technical analysis because (a), I don't think it works, but (b) is because technical analysis is where you're looking at stock charts to try to foresee where the market might go next ...
Alison: Just based purely on its movement.
Morgan: Based purely on the movement in the chart, and (a), I don't think it works, but (b) it's based on the idea of what the market is going to do over the next 30 or 90 days. And even if it worked, I wouldn't have any interest in that, because I'm investing for the next several decades. Even if it did work, I don't think it would be something I would pay much attention to, because it's based around a time horizon that is totally different than mine.
Alison: When I first started working at The Motley Fool, I didn't necessarily have a lot of experience in investing, but, of course, I started watching CNBC more. And at some point I realized, "At The Motley Fool we talk about investing in a stock for 10 years, and they're talking about only investing in this stock for like a week or two." Like you said, 30 to 90 days. And something clicked in my head where I was like, "We're having totally different conversations, here."
Morgan: If you are a portfolio manager or a hedge fund manager, then what the market does over the next 90 days is really important to you. That's your world, and that is important to you. But it might not be important, whatsoever, to somebody else. So it's not necessarily that one person is wrong and one person is right. It's just you're talking about different things, and a lot of times in financial debates, what we think is a debate between right and wrong is actually just a difference in time horizons.
Alison: That's interesting.
Robert: I saw an article today in the headlines ...
Alison: This is why we have you on.
Robert: Finally! Something interesting!
Alison: I never thought about it that way.
Robert: The headline was, "Get ready for six months of difficulties for the market."
Morgan: Yeah.
Robert: First of all, what do you do with that information? Are they suggesting that you should sell and then wait six months? If anyone who knew what the market was going to do in six-month increments, who could [predict] that accurately, they would be multibillionaires. Just tremendously wealthy. But those people don't exist. Instead, it's either folks like Bill Gates that started companies, or people like Warren Buffett who have been long-term investors. And it's just impossible, because the prices of the market are decided by all the investors. Millions of people from around the world making buying and selling decisions. And you just don't know what they're going to do.
Alison: But there are all these really rich billionaire hedge fund people on Wall Street.
Robert: But they're rich because they charge 2% a year and get 20% of the profits on those investments. That's how they're making the money. You do have the people who made fabulous wealth during the crash of the mortgage market, like Paulson, for example. But you look at his record since then, and he's done fine. But he's also said you should be owning gold, and that's been a horrible decision.
So you do have these instances where people made a killing at one time. Do they make killing after killing every six months? It just doesn't exist.
Alison: And the final item on your anti-reading list is content of excessive length and unnecessary detail. That just sounds like well-researched material to me. What are you talking about?
Morgan: It's easy for a writer to think that if they put a lot of time into a subject -- it took them a long time to analyze and they put a lot of effort into it -- that it should be a really long piece of writing. But from a reader's perspective, there's no points awarded for difficulty. The majority of books, I think -- but this is true for articles, too -- could be significantly shorter than they are.
It's funny. Now that we do a lot of reading on Kindle, where they have data behind it, there's a lot of data that Amazon tracks in terms of how far the average reader makes it in a book before they quit ...
Alison: Oh, yeah?
Morgan: ... and it's extremely low. One of the most popular books, last year, was called Capital. It's about wealth inequality. An average reader who bought the book made it 17% of the way through before they gave up. I suspect that is probably pretty common for most books. Most readers don't make it past chapter 3 or 4.
The point I made in the article is, I don't think you need to -- It can be a really good book, where the author makes a great point. You read the first three chapters and you say...
Alison: Got it!
Morgan: OK, I got it.
Alison: I got it.
Morgan: And the economics of the book industry demand that you write 250 pages, but a lot of times you can make a great point -- a well-researched, powerful, and life-changing point -- in 10 pages, if that. I always try to keep that in mind -- that just because something is long doesn't mean you need to read all the way to the bottom.
Alison: And Rick, what's your oft-used quote that you like to use?
Rick Engdahl: I believe it was Mark Twain. "I was going to write you a short note, but I didn't have time, so I write you a long one."
Morgan: There it is.
Alison: Yup. Who do you like to read, who you think does a good job of hitting that right amount of information without going overboard?
Morgan: I think the best at it -- and I don't read his blog very often, because it's a little outside of what I do -- but Seth Godin writes a blog where his blog posts are literally two sentences or three sentences.
Alison: Oh, wow!
Morgan: They're basically this long tweet. But he says he makes a big enough point in those two sentences that you're like, "That's great. That's perfect." In three sentences, he can give you more information and a bigger insight than a lot of people can in an entire chapter of a book. To me, that's the epitome of good writing, is when you can say the most in as few words as possible. He's someone who does it really well.
In general, Twitter forces you to do that, because you only have a sentence or two before they cut you off, so that really makes you think about, "What am I trying to say? How can I say it in as few words as possible? What are the big points without rambling on? How do I get people's attention in two sentences?" Twitter, in general, forces people that way.
Alison: That's like with poetry, too. I'm going on a tangent, but the idea of structure and form for poetry forces you to think hard. "OK, I'm going to do a sestina. Here we go. God, I have all these words in mind."
Morgan: Let's think about every single word.
Alison: Every single word. It makes me become much more deliberate.
Robert: A trivia thing about me that you may not know is I have a master's in teaching secondary English, and we did a lot of study about reading retention. Retention is so pathetically low when people read a book and how much of it they remember afterward.
Morgan: Which is all that matters, is what do you remember. They don't get anything.
Robert: Which is why if you can get the main point across in a short Seth Godin extra-tweet type of thing, you have accomplished quite a bit, because adding all those extra words will take up someone's time, and it doesn't necessarily mean that they're actually going to remember it after they've read it.
Morgan: Some of the best writing -- and I forget who said it. It's a famous quote and I forget who it's from. The best writing advice is, "Leave out the parts that people tend to skip."
Robert: When I wrote my very first issue of Rule Your Retirement, it was like 11:30 at night at Fool HQ. Tom Gardner and I were the only people in the office. I said, "It's the first issue. I'm a little nervous." He said, "I'll read it." He read it and gave me some good feedback.
And then he told me the story of -- is it the novel A River Runs Through It? -- where the dad would say, "OK, write me this essay." The kids would write the essay, turn it in, and he'd say, "OK, write it again, but now just cut it in half. And then do it again and cut it in half." It makes you boil it down to the essentials.
That's why Rule Your Retirement is only one paragraph. Everyone should subscribe. Just kidding. It's not really just one paragraph.
Alison: Of course, this is The Motley Fool, so I have to ask you whats your one book recommendation, or something you're reading right now that's pretty good?
Morgan: A book I just finished that I really enjoyed is called How Google Works. It's written by Eric Schmidt, who is the former CEO of Google.
Alison: Oh! OK.
Morgan: It talks about how Google works culturally, and as a business, and how they've grown from a garage start-up to one of the largest companies in the world. He goes into some detail about their organizational structure, their employee culture, how they work together, how they innovate. How do you be a giant company that's still really innovative? And he goes into detail about it. It might sound a little boring, but I think it's really fascinating. It's written in a way that is very accessible to almost anybody. I think anyone from an amateur investor to a business executive can learn a lot about it.
Do you know what my one criticism of the book was?
Robert: What's that?
Morgan: I think it's easy for someone at Google to underestimate how lucky they are to have a search engine that throws off $30 billion a year in profits, or whatever it is.
Alison: Just rolling around in piles of money.
Morgan: There are parts of the book -- and I'm grossly generalizing and paraphrasing here -- but it's like, "The key to innovation is don't think about how much money it's going to make. Just try, in the beginning, to think about cool products. Innovative products." And there are parts of the book where I want to say, "It's easy for you to say that when you're just minting money over in the corner, and you have all the resources you could ever dream about to do this," but it's a great book.
Alison: Wonderful. Well, Morgan, thank you for joining us. We'd love to have you back again on the show sometime in the future.
Morgan: Thanks.
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Alison: So keeping up with the trend of not reading stuff, I asked a few Fools for their summer non-reading recommendations. They could suggest anything, literally. The only catch was, it couldn't be a book. Here's what they had to say.
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Chris Hill: My name is Chris Hill. I host our MarketFoolery podcast, and I also host Motley Fool Money, and I recommend the Summer Olympics. I love the Summer Olympics. I try to block out all the stories about corruption, and things that may or may not be happening down in Rio, and just focus on the fact that these people, from all these countries around the world, are the very best at what they do.
Kristine Harjes: My name is Kristine Harjes. I manage our healthcare content on Fool.com, and my recommendation would be to join an adult sports league. They've got soccer, volleyball, kickball. You name it, and you can probably find it, especially if you live in a metropolitan area, but they're everywhere, and they're super-fun.
Rob Runett: Hi, my name is Rob Runett and I'm a project manager at The Motley Fool. I would recommend this summer that you check out a podcast. It's called How Did This Get Made, and it's all about a group of comedians who are reviewing a film that's not really A+ material, but they have an opportunity to talk about all of the most intriguing parts. I recently was on the show in a cameo appearance. I called in and they used one of my phone call questions where I asked the host, Paul Scheer, to name his top three TV theme songs of all time.
Alison: And what did he say?
Rob: He picked The Rockford Files, he picked Charles in Charge, and he picked the original Monday Night Football theme song.
Dylan Lewis: Hi, my name is Dylan Lewis. I'm the host of Industry Focus Tech. My recommendation for summer activities is The Passport Program. It's basically a booklet of buy-one, get-one-free offers at bars. I think there's like 12 participating cities. Washington, D.C. is one of them. My current mission is to hit all 50 bars between Memorial Day and Labor Day.
Gaby Lapera: My name is Gaby Lapera. I work in editorial at The Motley Fool, and my summer recommendation is to take a class at your local community college.
Alison: And what are you taking?
Gaby: I'm going to take organic chemistry.
Alison: Why?
Gaby: Because it's fun. I don't know. I was thinking about taking biochem, but they told me to take orgo first, so organic chemistry it is.
Alison: Fun!
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Alison: All right, Bro, what's your summer non-reading recommendation?
Robert: I'm going to go with the classic board games, and I say this because my family and I did this on Father's Day weekend, and we had a blast. I love board games. I love all kinds of games, but one of the issues in my family is that we have a significant age gap from the youngest to the oldest, so it's often hard for us to agree on a game that we all like. So we went with Pictionary.
Alison: Yeah...
Robert: And it was a blast. It was a blast. So I recommend that. The other game that, as a family, we generally love is a game called Dixit.
Alison: That one's fun.
Robert: It requires a lot of imagination, but it's a lot of fun.
Alison: Rick, what's your summer recommendation?
Rick: I also enjoy the board games. I'll give a thumbs-up to that. And also podcasts. There are so many podcasts out there. Great stuff. Whatever you're interested in, you can find great stuff.
Alison: So name one.
Rick: Recently I mentioned the History of English. I like a lot of history podcasts. There's a History of Pirates. There's a history...
Robert: History of Pirates?
Rick: Oh, yeah.
Robert: Oh, my gosh.
Rick: That's a really good one. So there's all kinds of history stuff, but also if you're into soccer, there's great soccer podcasts out there. If you're into words, there's The Allusionist. That's a great podcast.
Alison: Yes, that is a good one.
Rick: There's just tons of them out there. Whatever you're interested in, you can find deep conversations about.
Alison: And we also have a special guest in the studio today, Diane. First off, Diane, what do you do here at the Fool and what's your recommendation?
Diane Morris: Well, hello.
Robert: Hi!
Diane: I'm on the Motley Fool's people team, and I'm helping out with some of the podcast things, so it's fun to be here and see all this nonsense go down in person. Mine is actually related to what Rick was just saying about podcasts. If you are a fan of food, which I certainly am, or of the American South, I'd recommend a podcast called Gravy from the Southern Foodways Alliance. It's a pretty interesting look at some surprising things that go on. They had a really interesting podcast about a community in North Carolina of Laotian immigrants that grew up in North Carolina, that I never knew existed. So pretty existing and just something to broaden your horizons a little bit.
Alison: Cool!
Rick: Like I said, whatever you're interested in, there's a podcast.
Alison: So does someone want to ask me what my summer recommendation is?
Robert: I was just going to ask you. Alison, what's your summer recommendation?
Alison: Mine's a little weird, but it's Vinho Verde, which is a young wine from Portugal that hasn't matured yet, kind of like Robert Brokamp.
Robert: [Laughs] They drink thousands of gallons of it in New Hampshire.
Alison: Oh, we're still going to make fun of that, huh? New Hampshire and 4,600 gallons. Oh, my gosh. It has a lower alcohol content, and so the calories and the drunkenness are diminished. And it's fizzy, but the best news is that it's really cheap. It's less than $10, so...
Robert: So it is like me.
Alison: ...if you need a beverage this summer, I highly recommend Vinho Verde. Everyone else recommended like things, and I just recommend having a glass of wine, but whatever.
Robert: Whatever works for you.
Rick: Your recommendation actually goes well with a lot of the other recommendations.
Alison: It does. It's a nice pairing, isn't it? All right.
Robert: With Pictionary.
Alison: That could be fun. All right, that's it for the show. It is edited summer breezingly by Rick Engdahl. It works. It's fine. You can reach us at [email protected]. Also, if you have a moment, please head over to iTunes, or wherever you listen to our show, and give us a rating or review. We love getting ratinged and reviewed. If it's nice stuff. Only go if you're going to say nice stuff. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody.
