The Net Truth

Last year, a prominent financial planning newsletter editor asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes – call it a "net-net-net" return. Several dozen leading financial advisers responded. Although some didn't subtract taxes, the average answer was 6%. A few went as high as 9%.

They cannot be serious. 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. So, in order to earn 6% for clients after inflation, fees and taxes, these financial advisors will somehow have to pick investments that generate 11% to 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%.

Even the biggest investors are too optimistic. The Investment Fund for Foundations (TIFF), which manages $8 billion for more than 700 nonprofits, recently asked trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then TIFF asked them what minimal rate of return, after inflation and all fees, they would accept in such a swap. In TIFF's latest survey, the average response was 7.4%. One-sixth of the participants refused to swap for any return lower than 10%!

Faith in unreasonably high returns isn't harmless. It leads many people to save too little, in hopes that the markets will bail them out. It makes others ignore common sense, and believe in the claims of disreputable insurance and financial services agents who claim to offer ‘guaranteed’ but false returns. The end result is the same – a shortfall in wealth late in life, and more years working rather than putting your feet up in retirement.

Investors must seek the net-net-net truth. If a financial advisor says he/she can earn you 6% annually, net-net-net, say you’ll take it, right now. In fact, say you'll take 5% and let them keep the difference. In exchange, you will sell him/her your entire portfolio at its current market value. You've just offered the functional equivalent of what Wall Street calls a total-return swap.

Unless the advisor is a fool or a crook, your offer will be declined. Then you can determine a more rational rate of return, which is the number you should use for financial planning and analysis.

Some Of You Should Read This Book

Six years ago, the writers of The Daily Show With Jon Stewart published one of the best books of political satire I've ever read, America (The Book). This so-called "Citizen's Guide to Democracy Inaction" chronicled the history and workings of democracy in civics textbook form, including inforgraphics and sidebar opinions (from the likes of Stephen Colbert).

Spring Break gave me a chance to finally read through the latest book from the writers of The Daily Show, Earth (The Book). This "Citizen's Guide to the Human Race" may be the most entertaining, sharpest, and cleverly written book I've ever read. It again takes the textbook format used in the prior book, but this time to an even higher level.

Earth (The Book) is aimed at an audience of aliens who find the Earth deserted after the human race spectacularly manufactures its own demise. The subject matter has shifted from US politics and education to the planet and world civilization. And while America (The Book) was mostly written with many text passages and included commented infographics, Earth (The Book) is basically the opposite, with more commented infographics making for dozens of satice-laced jokes per page.

To give the history of the world some focus, the chapters are broken down into things like society, religion, science, and culture. A great example of the book can be found in the chapter on commerce, where newspapers float in the high-supply, low-demand quadrant of a supply/demand graph, just below ketchup packets and slightly above blogs.

One warning about this book - it will help tremendously if you have above-average intelligence, enjoy satire, follow pop culture, and have watched The Daily Show. If you aren't into any of those things, you aren't going to get this book. If you are into at least 2 of those 4, you will be entertained.

4 out of 4, and it will be one of the best books you'll ever read.

Beached Whales

Took last week off for a Florida vacation, and came back with a lot of things worth blogging about. Let's start with people at the beach.

I was at a prominent Gulf coast beach for several days, and I'm sorry to report that for the most part, the people-watching wasn't pleasant. Oh sure, there are some young hardbodies out there. The problem is, for every 1 of them there were 10 overweight slobs who have no business wearing a swimming suit.

It was universal, too - men and women of all ages and colors (including the color of sunburned) were showing off their rolls like proud bakers. I even noticed a few who hit the 'beach sloth trifecta': Fat, sunburned, and smoking cigarettes.

To add injury to insult, most of these folks were crammed into swim suits that were too small. Probably fit them a couple of years and several dozen pounds ago, but not anymore. It was hideous, it really was.

I support the development of a new flag symbol at the beach, to go with the ones lifeguards fly for dangerous weather conditions. Something to warn beachgoers of a higher than normal population of unattractive people in ill-fitting swimwear.

Being Better At Behaving Badly

I've blogged before about the virtues of taxing unhealthy foods, like we do cigarettes. Society pays future costs for smoking and obesity, so people who smoke and don't eat right should pay a price.

For another spin on this, below I've pasted the text of a blog post yesterday from Jane Wells of CNBC. This is NOT an argument against taxing unhealthy food, it's an argument that on the plus side (no pun intended!) we are far ahead of other countries in smoking cessation. (She refers to Asian countries here, but you can also include much of Europe):

"As I surveyed the human flesh crowding Waikiki last week, I noticed a marked difference between Americans and everyone else.

We're fat (and covered with a lot of ink). Everyone else, mostly tourists from Asia, are trim and tattoo-free. They're also desperately looking for someplace to smoke.

(On) Fat Tuesday, it's time to consider whether the real battle for global supremacy isn't about better ideas or better weapons. Instead, it may be about the least deadly habit: our guts versus their lungs. Who'll be the last man standing?

Currently, the CIA says people born in Japan and Korea can expect to live longer than those born in the U.S., though we're still ahead of Taiwan and China.

But these rivals for economic growth are watching their populations smoke like chimneys, while Americans are smoking less. The Centers for Disease Control says about 443,000 Americans die of smoking-related disease each year, compared to 112,000who die due to complications related to obesity (though this figure comes from 2005).

Of course, if we continue to gorge ourselves, those numbers could flip flop. But as you head into Lent, a season of fasting and sacrifice, at least consider the possibility this Mardi Gras that being "gras" isn't as bad as being a smoker."

We Need More Critical Thinkers

A while ago, I blogged about the politically incorrect topic of stupid people, and how this country has too many of them. It's a statistical fact - check it out.
http://streffblog.blogspot.com/2009/08/stupidity-is-easy.html

Reducing dumbness, however, is only part of the answer to curing society's ills. If we had more 'book-smart' people, that would help, but what we really need are more critical thinkers.

A critical thinker doesn't accept everything they see or hear as fact. They have an ability to separate fact from fiction, based on probabilities and god-given common sense. This negates the herd mentality.

Here's an example from just this past week. More than one person I know, who apparently don't have enough to do, forwarded me emails about some outrageous act of a politician. Since stupid people believe everything they read on the internet, especially things forwarded to them by acquaintances, I can only imagine the collective outrage of the recipients.

Except that none of the email was true. Folks, all you have to do in go to a search engine and type in a few of the key words along with the word 'hoax'. More often than not, you'll find out the email you got had more to its story.

I know, I know, I'm using the internet to prove something else on the internet wasn't true. Fortunately, I'm a critical thinker, and I can separate fact from fiction on the intenet!

Imagine how much better the world might be if more people thought critically, and didn't just accept the words, actions, or faith of others. But suffice it to say - again - that most people are sheep, easily led to the slaughter. That's the entire business plan of Fox News, right?

So if someone tells you to stop being a critic, tell them to start being a critical thinker!