I was a bit desperate tonight for entertainment before the ball drops and happened to tune into Mad Money, I am sure Cramer is please as I single handedly increased his ratings from 1 to 2. Regardless, tonight I realized why I stopped watching this guy. He has no sense of decency, memory or humility whatsoever. In fact, all he does is revise his picks, his history and track record all the time. I will post videos to prove it in a little bit.
Tonight he was talking about retirement, which is a joke since he ignored what I rightfully pointed out is the most important thing in retirement planning, the sequence of returns, oh well, why let the facts, oh forget it. Anyhow, here is what you need to remember about good old Jim, he invested in the greatest bull market ever, yes he was a hell of a fund manager, but regardless it was also the greatest bull market ever, and he rarely held positions for very long. If you doubt this then go read Trading with the Enemy which was written by a guy who worked for Jim, apparently Jim is not a nice guy, go figure.
My point is Jim knows nothing about retirement planning because it is a totally different ballgame than trading stocks. It involves a complex range of skills sets and knowledge that not just any person has, sorry, but it’s true. This does not mean I am not a guru and I am not claiming this, but I do consult in this area and speak with experts all the time so I have a good grasp on the topic. Anyhow, tonight Jim claims that he “loves” index funds, but does he really?
It is true he used to tell people to invest in these funds until they built up $10K to trade stocks. However, earlier this year he got rather upset at a guest on CNBC, I am searching for the video, where he went off on the guy saying that anyone who invested and held, i.e. buy and hold investing in index type funds, were losers, literally, because they got killed over the last 12 years. At that time the markets were at historic lows so we were at levels not seen in over a decade. At that time he advocated being active in your account and moving money, which has always been my belief as I believe that passive and active management performance is cyclical. I guess he changed his mind since the market recovered though because now you should own index funds and then add stocks after awhile.
This man must confuse the hell out of his viewers. I mean, one day he is telling you to buy dividend stocks, then buy internet stocks, wait, now buy Best Buy before the earnings and the next day he is saying never buy a stock before the quarterly earnings and now he is saying that your core holdings should be index funds? If you are confused, so am I, but that is what the man said, so don’t blame me. The kicker is his disclaimer is that he is merely trying to entertain you, but here is what I just cannot figure out. If he is entertaining us and we really should not take him seriously, you should never take an entertainer seriously in my book, then why is he dispensing buy and sell recommendations on stocks?
Worse yet, why is the advice he’s giving one night in direct conflict with the advice he has given the night before? Honestly, I am not trying to give him a hard time, but I have a real problem with people revising their history, especially when it is on TV and it is easily searchable. If a broker or a financial advisor acted like that or dispensed advise like that FINRA would slap them so hard it would not be funny, but not commentators, even though the history of what they said is recorded. It is just unreal that this type of behavior can continue and no one says anything about it. I don’t care if the advice is bad, hell Suze Orman says lose your house before you even think about tapping your IRA for an emergency, yeah, that makes sense, everyone gives bad advice, but don’t cover it up.
What no one wants to talk about, ever, in terms of retirement planning is the sequence of returns and the impact on retirement planning. I am bringing this up now as we wrap up the worst 10 year period ever in the S&P 500 we have ever had. In fact, technically, this is the only official 10 year period of time the S&P 500 has ever been negative. I say officially because the 10 year period is subject to interpretation, but regardless we are looking at a period of time wrapped by 2 of the worst periods ever to invest in the equity markets. In other words this decade had the mother of dumbbell negative returns ever.
What the impact of this 10 year period has had on retirees will be felt for the next couple of decades. Essentially, many retirees or pre-retirees have been wiped out or will have to drastically alter their lifestyles in order to make their money last. While I could easily blast the likes of Scott Burns, Suze Orman and a million other drive by financial advisor writers for dispensing horrible advice that they likely did not even follow themselves, I will not. They simply told people what they believed to be true because they used flawed logic and ridiculous assumptions that normal financial advisors would have dismissed as idiocy, not that they are innocent either, but they were the targets of these writers inept ridicule for long enough.
The simple fact is this, everything has a cycle whether we are talking about the Earth, the moon or the markets they all of a cycle. When we look at market returns sometimes the cycle shows an unmanaged index does substantially better than managed money while at other times managed money does better than the unmanaged index. Over the past 15 years we saw the unmanaged index do better than managed money, but will that trend continue? Unlikely. That cycle has run its course from my point of view, sure there will be stand out sectors, but that is it. If you go back in time to the 1970’s it is fair to say that this theory of mine pans out and managed accounts did better than the unmanaged indexes, but you know me, let’s not let the facts get in the way of what they pawn off as the truth.
The beginning of this decade should have been the warning sign for those following the advice of the financial rags who themselves have never ran money or witnessed what it is really like to lose someone money. Instead they blast brokers for making money and tell you to buy an index fund because over the long-term “nothing outperforms the S&P 500,” how’s that working out for you? Simply put, they did not know their history and they over simplified a very complex thing, your retirement planning. Retirement planning is complicated and deeply personal and no one, I really mean this by the way, should ever take their retirement planning advice from the TV or newspaper.
With hindsight on my side, unfortunately, it is now clear that these people did not know what they were talking about. Not only that, but their intentions are now out for everyone to see. One person mentioned already, who always advocated Vanguard index funds, opened an RIA firm and will gladly manage your money for a small fee, even though he said brokers were crooks before, unless he is the broker I guess. The other person sells binders for $50 or $100 that you can buy at Staples for $10 or $20, but since they are branded with their logo or some other nonsense they are worth more, I am still trying to figure out why that is. Either way, to their legions of devoted followers their betrayal means nothing or they will continue to mindlessly follow them, which is astounding to me, even though they destroyed their wealth. Here is what I mean.
The sequence of returns is the timing of returns, either good or bad, and the impact on your portfolio. This is the most important aspect of investing and the biggest ‘Black Swan’ there is because it is out of your control. This is why asset allocation is so important when you are talking about your serious retirement money. I have a larger portion of play money that I speculate with, but you better believe that my real money, my retirement money, is not in some E-Trade account with my finger on the buy/sell button all day long. I have a plan with my real money and I do tinker with it occasionally, but only when I feel the need to be more conservative or more aggressive, but it is professionally managed, not by me, to keep my emotions out of the game. However, the sequence of returns is always ignored by most gurus I read or listen to and it will devastate you if you are not careful.
If you invest and instantly lose 10% for the first couple of years it takes you a very long time to regain those losses or exceptionally high returns for a few years. It is even worse if you are taking income from your portfolio which is the case for many retirees, unfortunately. I am going to concentrate on those taking income from their portfolios in this example, just 5% income I might add, because many Boomers retired either in 2000 or in the last few years, either way you will get the point. I am not even going to show you the double whammy of the dumbbell negative returns because that is so depressing it is not even funny. In fact, this will be and is such a serious problem I am not sure what can be done about it because literally millions of Boomers are in serious trouble now.
Here we see someone who decides to retire and rolls over his 401K and listens to a buy and hold indexing guru. They decide to invest into a generic fund and let it all ride thinking that 5% withdrawals should suit them just fine, since he is told the market averages 10% over the long-term, another farce I might add. Unfortunately for this investor he got suckered into a bad time to invest and the market fell 10% for the first 2 years he owned his fund, but no problem writes the financial guru, just hold on and everything will be fine, really? Well, you tell me if everything looks fine to you.
Exhibit 1-1
Keep in mind, I am not showing any other negative returns, not even a negative 1%, and I am showing +8% returns for every other year in this illustration. I am also showing a straight 5% withdrawal rate, not ever a little more for the grand kids, to pay the taxes or medical bills, just 5%. This person runs out of money in about 20 years with 2 negative years right off the bat and they did not even look that bad, 10% market declines are, well, normal right? That is just one illustration of the sequence of returns and how they can impact the investor, not imagine if I put in the 2008 50% decline in there, there would not be anything left. I also ran this with 6% withdrawals, but the only difference is it gets uglier faster.
There is nothing you or I can do about the sequence of returns, but I have never seen something so important ignored before. While we are wrapping up the worst decade on record for stocks don’t you think we should talk about this stuff a little bit, especially since Boomers are about to retire in droves, well they were at least. Frankly, those bond funds everyone is slamming right now, do you know why they are so popular, not that I agree with it I might add, but they are so popular because they have positive returns on the 5 and 10 year benchmarks. Look at equity portfolios, most funds look horrible, except some managed funds I might add, but in comparison investors are saying, well sure this fund only did 5%, but it is better than the -3% I did over 10 years, so buy it.
I may sound bitter, but this is serious stuff that people just take so lightly and it drives me nuts. CNBC is now all about entertainment, not about serious news anymore which is a shame. The personal financial gurus are all about selling their latest book rather than helping people do real things, but maybe it is the peoples fault when you have to have a segment called can I afford this. People, if you have no money in the bank, in debt up to your eyes, make $50K a year, then no you cannot afford a $700K house, it is common sense. However, even though they are getting calls like this it does not justify giving out poor advice, ignoring history, not understanding the sequence of returns, the basics of asset allocation, vilifying brokers, picking on products – yes folks a variable annuity turned out to be the best product in the world to buy in 2000, and simply recommending index funds because they are index funds – a monkey could do that.
OK, there are lot’s of things we could say about Mr. Cramer, but you know what I kind of like what he does. Before you get the wrong impression I do think he is dangerous and makes some bad calls, i.e. the housing bottom, but he does get people interested in stocks which is a good thing.
Even though I strongly disagree with most of his views he brought up an interesting idea tonight. He says that the government should issue a 30 year bond paying 5% which he shamelessly called the Cramer Bond. The general idea is interesting, but who would give the government money for 30 years only to receive 5%? Now, he did say make it tax free, but still that is betting that inflation will stay below 5%, which it really has never done.
He says you will double your money after 14 years, plus a few months, and they should be offered directly to the public with no fees. All good ideas, but Jim a product already exists like that.
There is a product that is rated AA that guarantees to double your money in 10 years, without taxes until you withdraw the funds. It is not right for college planning, but it is perfect for retirement planning. Not only that it allows you to participate in the market and you could, potentially, do much better than a simple doubling of your money. You have different investment options and a guaranteed fixed account, sounds better than 5% doesn’t it?
There is a catch, there are fees and you have to buy it through a broker. What is it? It is a variable annuity with living benefits. You can choose a guaranteed minimum account balance option or a guaranteed income benefit, but nonetheless it is better than your proposal. I know it is not as sexy as a high tech stock or some other off the wall investment, but it meets the needs of investors, period.
Say what you will about annuities, there simply is no other investment that can do what they do. Yes, you will take a risk through both investments, but that is mitigated through guarantees, but also the risk of the insurer. However, I feel much better about insurers risk than I do about the massive debt being issued by our government. Not only that, inflation will be an issue so 5% is not good enough.
Good idea, one of your better ones, but as usual you miss the obvious. I cannot wait until I get the tell all book written by one of your employees. Should be an interesting read!
If you have not picked up John Huggard’s Book, “Fifty Reasons why variable annuities may be better Long-Term Investments than Mutual Funds” you should grab your copy today.
You can get your copy here: John Huggard This is not an affiliate program and this has nothing to do with Annuity IQ. I just believe so strongly in the information that I believe every adviser should read this material.
If you do not know who John Huggard is here is his bio:
John Huggard is the senior member in the Raleigh law firm of Huggard, Obiol and Blake, P.L.L.C., limiting his practice to estate planning and financial litigation. John is also a Certified Financial Planner and full-time faculty member at North Carolina State University where he has taught introductory and advanced courses in law and personal finance for more than twenty-five years. John is an Alumni Distinguished Professor and is a member of the Academy of Outstanding Teachers at North Carolina State University. John is a Board Certified Specialist in Estate Planning and Probate Law. He is the author of The Administration of Decedents’ Estates in North Carolina (Michie Pub. Co.), The North Carolina Estate Settlement Practice Guide (West Pub. Co.), and Living Trust, Living Hell: Why You Should Avoid Living Trusts (Kendall-Hunt). Additionally, John has published several magazine articles on legal and financial matters. John has been extensively interviewed and quoted in The Wall Street Journal, Smart Money, USA Today and other financial publications. John regularly lectures to professional groups on topics dealing with variable annuities, taxation and finance. John received his undergraduate degree and law degree from the University of North Carolina at Chapel Hill and his master’s degree from Duke University. John’s hobbies include flying, competitive target shooting and scuba diving. He is recently retired from the U.S. Navy where he served as a captain in the JAG Corps.
Money Magazine and Mr. Updegrave have written another mind numbing article where he made a startling revelation to his readers. Whether or not they saw the revelation is another story, but it is right there in print.
In this article Mr. Updegrave said, “For example, I’m fine at tinkering with retirement calculators and monitoring investments – though I’m careful to keep my wife informed. She’s good at the big-picture stuff.”
The part of the quote I want to comment on is the, “She’s good at the big-picture stuff” because this is his overall problem. He is fine with ‘tinkering’ with calculators, but is poor with the big picture stuff, both of these admissions run dangerously close to self admitted lack of knowledge and imagination.
As an expert shouldn’t you do more than just ‘tinker’ with things and shouldn’t you have a grasp of ‘the big picture’? You would think so, but apparently this stuff does not matter to him. Financial advisers do more than just ‘tinker’ with calculators and peoples financial well being and try to match the investment selections for their clients to their goals, risks and objectives while keeping ‘the big picture’ in mind.
Since Mr. Updegrave does not get ‘the big picture’ and only likes to ‘tinker’ with peoples financial well being it should be a red flag to his readers. Those words, as subtle as they were, in my opinion, were an admission of the truth. He simply does not understand the common problems of investors and likes to ‘tinker’ with the advice he gives and he does not worry about ‘the big picture’.
Tinkering with people’s money and investments is horrible and an insult to people who take him seriously. Do you see doctors tinkering with people’s health? Of course not, but I guess it is OK to tinker with peoples financial health. You can not do a financial plan on a calculator because there is more to it than simple calculations.
I believe this is why his advice is so generic and cold, it is simple repetition and it always goes like this; “Invest in the S&P 500 index fund and forget other advisers advice”. When I read those recommendations all that flashes through my head is HAL, from 2001: The Space Odyssey, saying those words in his cold computer voice…am I giving away my age here?
Since he admittedly does not grasp the big picture and only likes to tinker around with calculators it is painfully obvious why he does not like variable annuities. You need independent thought to understand the product and how it works and where it fits into the big picture of retirement security.
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