Mike Egan has heard numerous investment myths bandied about for decades.
Announcer: You’re listening to Tradestreaming Radio with your host, Zack Miller. Expand your mind. Become a better investor with tools, tips and technology from the smartest investors on the planet.Zack: Hey, welcome to Tradestreaming.com, I’m your host, Zack Miller, and you’ve chosen wisely, my son, if you’re interested in learning about investments directly from experts. Today’s expert is Mike Egan, long-time financial industry professional, first time author. His new book, actually launching this week, is called “Your Stronger Financial Future: Eight Essential Strategies for Making Profitable Investments.” It’s about long-term investing. It’s about retirement investing and planning. Check it out. We’ll turn it over to Mike shortly.Come back to Tradestreaming.com. You can get our archives there as well. Sign up for our email list so we can notify you. It’s a free list about all the new stuff that’s going on. We’ll be launching mini-courses for those of you looking to delve deeper into some of these concepts. We’ve got transcripts up about all of our shows. It’s a great resource. Come on over; check it out. If you’re listening to us on iTunes, you can also get our archives there, as well. Feel free to leave a ranking or rating. Let other people know exactly the value you’re finding in this podcast.
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Mike: This is Mike Egan, author of “Your Stronger Financial Future.” I am a registered representative with Moors and Cabot, based in Boston. I’ve been in the business since 1990, starting first with Lehman Brothers, and then with Legg Mason in Baltimore, Maryland, and I’m based in Florida.
Zack: Very interesting. This book is a series of, I guess, strategies, but the genesis is sort of misconceptions. Do you find that, I guess, in our business that there are a lot of misconceptions?
Mike: I find that that seems to be the overwhelming methodology by which some investors make choices, and Zack, you and I talked in the past about when I’m out at my kids’ soccer matches or playing tennis with friends or just out socially, once someone finds out what I do for a living, which is a very small niche in the investment business, regardless of that niche, they’ll ask me, “What should I do to solve this financial problem, or what’s something ‘hot’ right now?” And my answer generally is, “Do you have a financial plan? Do you have a financial advisor? Do you have someone who’s helping you with this, or are you yourself a student of the market?”
And almost always, I’ll get a blank look, and they’ll say “No, I just depend on the media and what I read on the internet to make investment choices.” And I think, okay, sometimes there are good investments that one can find through those sources, but the majority of the time, you really want to depend first on a financial plan, and a professional advisor to get you in the right direction. So, I think that the majority of the people I run into – the majority of the baby boomers – invest based on whim as opposed to a well thought out financial plan. That was really the genesis of the book, or the thought process in the book. Let’s take as many of those misconceptions or myths as we can, the most popular ones we can find on the Internet, and let’s explore the myths to make sure that everyone’s talking about the same thing. The myth is X or Y or Z.
Then let’s go to the truth, which is going to do the research behind that myth, trying to figure out what caused that myth. Like any good myth or misconception, all of these have some degree of truth behind them, so it’s exploring that truth a little bit further. Those are the first two sections of each chapter. The third section of each chapter is what we call the strategy, or the plan: what should you, as a reader, do, based on that myth and that truth? So it’s bringing out what I think of as very fundamental investment, retirement planning, and savings ideas that we’ve all heard from time-to-time and turning them a little bit so that they’re clearly an answer for what is a misconception today as opposed to the other way around.
Zack: Before we drill down into a specific strategy, I just want to address something you just said. So one of the things that I talk about on this show and that listeners will be accustomed to is what I call the bull market in financial content. Just a plethora of stuff out there, whether it’s data or opinion. The internet has enabled all this capability at users’ fingertips. You’re talking about the underbelly of that, which is, “OK, now that I have all this information, I feel empowered to make my own decisions.” Can people not make their own decisions here? I want to just focus in on where the misconceptions come. It’s not rocket science, per se, right? You could learn this stuff if you needed to.
Mike: Most certainly, and I think most investors would be well-served – in fact, I’m struggling to think of any investor who wouldn’t be well-served by going out and learning more about the investment process, about asset allocation, about financial planning in general because you’re exactly right. It may not be rocket science, but there is quite a volume of information to digest that is just the fundamentals. I try to compare this from time to time to a GPS system in a car. If you know where you are right now – and if you don’t, the GPS will tell you – most importantly, if you know where you want to go, all you need to do is program into the GPS and press the button.
Now, there are some times when GPSes don’t work for various reasons. The signal gets interrupted, where you’re trying to get isn’t in there – it’s a new house, or a new development, or a new restaurant, whatever it is. But the vast majority of the time, that GPS will take you from here to there in the way you specify. Most used highways, shortest time, et cetera. What I’m suggesting in the book is that most investors don’t turn on their GPS. They get in their car – and of course, this is the analogy – and start driving and hope they’re going to get where they’re going to get to. And I think we all know, those of us in the business, that your chances are pretty slim of getting where you want to if you can’t define that destination. Once you define that destination, which is the financial plan if you will, or the financial goal, now the plan itself is fairly straightforward to your point. It’s very straightforward to learn about how to get from here to there, once I know where there is.
Zack: Yeah, my wife likes to compare it to going to the doctor. You can learn about all kinds of maladies online just be researching it, but self-diagnosis and self-treatment can be dangerous. But obviously, knowledge is power in the sense that even if you do work with a professional you know the right questions to ask. But I sort of feel like this fire your broker model, in some way, obviously, the fees were bloated in some cases, and a lot of brokers weren’t that much more knowledgeable than their clients. But it freed people up in a way where they’re taught that there’s something inherently bad about going to professionals, and that, to me, is the dangerous side. Especially as, we’ll talk more about baby boomers, as you get to retirements, some of the nuances around retirement, you can’t retire by owning a bond fund. That’s not going to get you there these days. So, it’ll be interesting to hear how you feel a professional can add value during that process.
Mike: Well, you bring up a very good point. I would agree that the media – and I’m including the internet, of course, in the media, not just TV and radio and newspapers – has been very negative in the last five to ten years on the advice provided by financial professionals, and a lot of that negativity, in my opinion, has been centered on the costs associated with either commissions or investment management fees. There is a study put out by Charles Schwab. Let me just find it so I can give you the exact quote. Charles Schwab did a study, and I can give you this a little bit later so you’ll have the exact thing.
Zack: Yeah, I’ll put it in the show notes if you can provide it.
Mike: It was a study of 401(k) participants. Those participants who utilized a financial professional had returns 2.5% per year higher than those participants who did not. This is not in the 401(k). This is overall just in a questionnaire. “Do you have a financial professional?” If yes, then the study found that that individual’s returns were, on average, 2.5% higher per year than if you didn’t check that box, if you checked no.
Zack: That’s interesting. I think there have been some other studies, though, that said there wasn’t necessarily a lot of value once you factor in fees, and that some of the value that professionals provide is helping investors not get into worse trouble. Sort of like a backstop, which I think is a valid argument as well. As you’re describing this person that drives without knowing where they’re going, having a professional, at least prevents you from crashing is a big deal.
Mike: Agreed, or at least someone to gently suggest to you, “Let’s chat a little bit about where you’re trying to get to in a vague sense.” Because even if you have a vague idea of where the restaurant is, again going back to my GPS analogy, you’re considerably more likely to end up in the vicinity.
Zack: Right. Let’s at least have the discussion about it, right?
Zack: So, let’s talk about the baby boomers. There was a lot of excitement around this demographic getting closer to retirement, this huge wealth transfer. How are they going to fare in retirement, or how do they think they’re going to fare in retirement?
Mike: Well, that’s a great question. The Boston College Center for Retirement Studies has an enormous research . . .
Zack: They have a whole department, right? I’ve seen some of their work.
Mike: They’re spectacular, and their work is terrific, so a lot of the statistics I’m about to cite come from them. Most recent survey, I believe the data is 2008. I can get that to you, Zack, if you publish this. Over 51% of Americans are unprepared for retirement.
Zack: Wow. What does unprepared mean?
Mike: Meaning they either won’t have the savings, or they don’t have a financial plan.
Mike: So, just not ready for it. Putting the decisions off to get from here to there. Their “there” is a little too vague. Same study: 24% are prepared for retirement and are aware that they are prepared. So these are individuals or families who have taken the time to figure out where do I want to be, and what is that going to cost me, and do I have enough to cover that?
So if I say 24% are prepared and aware that they’re prepared, that leaves 76% of the country – or in this survey, mostly the baby booms, that need some kind of help, whether that’s help, to your point, that they provide for themselves by becoming students of the market and the financial planning process, which of course, you and I would both encourage them strongly to do, and/or they secure the services of a professional financial advisor.
Zack: So what’s your feeling, I mean, is there more data; are these people going to be okay? Is it just a matter of getting a plan in place, or are they, for lack of a better word, screwed?
Mike: I wouldn’t want to use that word, although, I don’t disagree with it. I think that these people are not going to be able to retire. I think they’re going to have to continue working, and I’m also troubled by the fact – I don’t have the statistic right in front of me, I’m going to have to get it to you a little later – I believe it’s over 40% of those who believe they can work past the standard retirement age for their particular job, so if the standard retirement age is 65 in a particular field, they say to themselves, Well, I’ll just keep working or I’ll get a consulting job.
Mike: Excuse me, I’m finding the statistic: 15% are able to find such a job.
Mike: The other 85%, I will tell you that I’m worried. That’s just an enormous number of people, Americans, who will be required to find some other way to make ends meet. And I know at some point they’ll get to Social Security, which will provide some of that, but not as much as most Americans need.
Zack: That study is sort of like one of those other studies I’ve heard quoted, where people are asked if they’re going to make it to the top decile of income or wealth and over 50% of people think that they will make it there. It’s going to be an issue because even the plan that these people need is okay, maybe you’re not going to make it, but let’s talk about what your work life is going to look like in post-retirement years. Whether you’re monetizing hobbies, or whatever you’re going to do, you still should have a plan, right?
Mike: Most certainly, and the faster you have a plan, the faster you can start implementing it, and I think more importantly, it’s the psychology of having a plan. Some people resist having a plan because they say, well, I don’t know what’s going to happen tomorrow. The economy is in a challenging phase…
Zack: It’s not very Daoist.
Mike: Yeah. I might get a new job, I might inherit money, I might not inherit money. There are all kinds of variables out there, and I’m not disagreeing with any of those variables, but keep in mind, a financial plan is not set in stone. It is a living document that you should review either on your own because you’ve educated yourself or with a professional at least once every six months. Just update it. It’s like an annual checkup with your doctor or your dentist. It’s quick, it can be somewhat painful if things have changed dramatically, but often it’s just making minor changes along the way. I find that most of those investors who have a plan have made those slight adjustments along the way. Maybe it is picking up . . . monetizing a hobby is a great way to say it. It’s a great phrase, if I can borrow it from you, Zack.
Zack: I mean, people are doing it even younger. I mean, I do that as well. I pick up some consulting gigs on the side, and that’s something I hope will continue through the rest of my career.
Mike: Agreed, and for most Americans who have a larger contact or influence list than they might think they do – and that’s a subject for other authors, how to find those contact lists and how to think about how you can be beneficial to them and add value and get paid for it – the earlier you start thinking about that in your career… Gosh, if you’re thinking about that in your forties and fifties and not waiting until the year before retirement, it just is logical that you can build up a much bigger contact list, and whether it’s consulting or some other type of method where you’re adding value and getting paid for it. If you start thinking about that in your forties and fifties, gosh, you might have quite an income by the time you’re in your sixties, and you may be able to retire early from your “day job” and move into your second career.
Zack: Interesting. So a big piece of this retirement question is whether Social Security is going to be there for people. You have these Chicken Littles who think that the sky is collapsing, we’re all on our own. What’s your view on Social Security and the viability of the program going forward?
Mike: Well, I think that there is an enormous amount of conversation about Social Security. Right now it is 23% of the federal budget, and it will continue to grow. And let’s face it: there are a lot of challenges with Social Security. When it was created in 1935, there were 16 workers for every retiree receiving Social Security, so 16:1. In 1940, just 5 years later, there were over 42 workers per retiree, so 42:1. Today, in 2011, there are only 3.3 workers per retiree, and in the year 2050, there’s only going to be two workers for every retiree. So clearly, that puts a lot of pressure on is the system receiving as much revenue each year as it is paying out. And we all know that that number, right now, is yes, but it’s very quickly expected to be a no.
In other words, while there is a huge trust fund built up, sooner or later that trust fund or that savings account, if you want to call it that, will need to be accessed because there just won’t be as much money coming in as there is going out. Fairly simple solutions to that would be – and I’m not making these up, these are in the media all day – the longer you delay allowing Social Security participants to access those funds, the shorter amount of time actuarially that they’re going to access it. We all have a certain actuarial lifespan, on average, and the later you start accessing Social Security, the less time you’re going to access it. So you have a lower expense there. But also, the longer you wait, the more time the trust fund has to grow and the more time you’re paying into the system. The numbers, the math really works, by delaying retirement.
Zack: Are we talking about a year or two, or are we talking five years?
Mike: I think it’s more three to five years. Those numbers are calculated constantly, and they change every year, but right now Social Security is being phased in to full retirement benefits at age 67. My speculation is that over the next five years, we’re going to see that phased into age, 72. Remember, the whole idea of Social Security was several. It was disabled Americans who had no other way to get a job or another way to support themselves; it was the elderly, and it was those who could not work for whatever reason. From a retirement benefits standpoint, you only lived three years, on average, from age 65 in 1935, to your actuarial death. Your life expectancy was 68 in those days. Now, your life expectancy is 78.
Zack: Meaning every person that reaches 65, the expectancy is 78, or that’s just a general number?
Mike: Right now, just life expectancy. I don’t have that statistic…
Zack: I think the number’s even higher for people who make it to 65, I think it’s almost in the 80s at this point.
Mike: I would believe that’s exactly right. The longer you live, the longer you live. And excuse me, I just read the wrong number. In 1935, the life expectancy was 62.
Zack: Wow. People weren’t even reaching it.
Mike: Right. Exactly. On average, you weren’t going to get there, so there wasn’t an expense. Now, if you can live to 78, if we can just focus on that number for a second, you have 13 years of receiving Social Security. Clearly, the idea here is not for the government to fund an extensive retirement, although that would be nice, if we could afford it. Clearly, I don’t think we can as a country. But to increase that retiring age would seem like a fairly obvious solution.
It’s a less painful solution, and it is profitable for politicians, in my opinion, because the further away that is, the less likely someone is to object to it. Those in their twenties and thirties today may not object to the retirement age being increased to 72 or 75 because it’s so far away, whereas those of us who are preparing for retirement – I’m in my mid forties, so I’ve got quite a distance, but those in their fifties and sixties might not see any change. So from an actuarial standpoint, increasing the age would appear to be not only the most mathematically responsible, but it’s also politically feasible.
Zack: So we’ve got Social Security, that piece sounds like what you’re suggesting is a practical solution. What about other problems that typical investors have as they’re reaching retirement, you know, the inability to save more, or the other side of the coin, which is the accrual of debt. How is that going to effect them? Are people prepared from a behavioral point of view to enter retirement?
Mike: Well gosh, Zack, that’s a question for three or four more books, and certainly outside the realm of my expertise, the behavioral and the psychological aspects that you’re speaking of. I think that there are… You can really oversimplify retirement but to compress because we don’t have much time in your day for this. I can go on forever. It really is savings minus expenses, and I need to have a certain amount of income or access to savings and earnings from savings to fund my lifestyle from a particular day I want to retire to my actuarial death, and probably just in case I’m one of those who live longer that I have some cushion, right?
I mean, I don’t want to expect to die on this exact actuarial date, and then lo and behold, I’m one of the healthy, lucky ones who lives longer. So I find that most of the media focuses on reducing expenses. I happen to be looking at a cup of Starbucks coffee on my desk. I’ll admit that I’m a little bit addicted to that particular company.
Zack: Buy the stock, buy the stock!
Mike: That is a way to reduce costs and certainly, it would be a way to reduce costs. My thought is, instead of focusing on reducing cost, it’s more important to focus on increasing revenue, and those revenues which will be sustainable, as we talked about earlier, perhaps extending your career into monetizing your contact list or hobbies.
I think that the prediction of expenses is always very low, and I think that the use of debt…
Zack: You say predicting expenses in retirement. You mean forecasting future expenses?
Mike: Yes, thank you for that clarification. I believe that medical costs, while it would be wonderful if our state and federal government could pay for all of our medical care expenses from now until the grave, I don’t think that’s realistic. I don’t think that the government in this country will be able to afford the type of health care that Americans demand. So, when I look out from a statistical perspective and think, “Have Americans saved enough?”, I don’t think that we as a country have saved enough just for medical care, let alone enough to live on.
Number one is under predicting future expenses. Number two, in my mind, would be the use of debt. I think debt is useful and productive in very, very few cases, and those would be cases in which you can see a greater return going forward. So, as an example, attending university, especially a state university as opposed to private because the numbers are just so much less expensive. Because of the statistics we’re all aware of that college graduates earn such a higher hourly or annual wage than just high school graduates. It’s pretty easy to make that math work. It’s a good idea to take on student loans to go to college and to finish college.
Another very good idea, generally, is buying a house. Now when I say buying a house, I don’t mean on speculation, I mean a house that you’re going to live in that is well within your means with a very short mortgage. My suggestion is seven years as opposed to 30, because you have to pay it off a lot faster. It gives you a lot of time to save.
Outside of college or education debt and mortgage debt for your primary residence? You’re pretty much ill-served by using any type of consumer debt. And I think those two issues are the big obstacles in American [inaudible 24:55] to get through. And look, I’m not making any of this up. You can open any newspaper, and you’ll see article after article on these topics. That’s what a financial plan helps an individual do, is realize, oh my gosh, I just don’t have enough.
Zack: It’s interesting. We’re having a guest on later this week for a live event, Professor Ian Ayres, who wrote a book called “Life-Cycle Investing” that came out last year? That was somewhat controversial, because he recommended looking at your lifetime earnings as an income stream, called a bond stream even, and basically in your young age, borrowing against your future earnings to invest in the stock market. So if you’re in your twenties, you would basically lever up 200% on what you have and invest it. Maybe that does fit into your exceptions to the rule, because doing that, if you look at the statistics, it does look like that will mean you have more later on, but you also run the risk of blowing yourself out, and I think that’s probably a bad idea, but it will be an interesting event, by the way.
So before I let you go, I do want to talk about one strategy, your strategy number seven which is not necessarily something talked about in the media. Can you talk about annuities and how to leverage longevity risks?
Mike: Well, Zack, I need to stay away from any specific investment products. I can talk about risk.
Zack: Can we talk about it on an ideas level?
Mike: Sure. Annuities. Let’s talk about Social Security. Social Security itself is an annuity, meaning that you pay in, in this case, you pay in your employee contribution over the many years that you work and are taxed in this country. And the government promises to pay you as long as you have reached 40 quarters of qualification for as long as you live, a certain amount of dollars, depending on the age you retire and the amount you paid in. As long as you’re a full participant, then everybody gets the same amount. That’s an annuity, meaning that the amount is paid for up front, you have a guarantee – in this case, the US government – and when you die, with certain small exceptions like survivor’s benefits, the payments stop. It’s very different from a savings account, where you’re putting money in and you can take that money out as fast or as slow as you want or not at all and pass it on to your children or your heirs, et cetera. An annuity is something that is, effectively, insurance. Is that suitable for every investor? I would defer that question to each investor.
Zack: Right, and there’s no way you can answer that.
Mike: No way I can answer that, but I think that forced savings or disciplined savings, whether it’s an investment, whether it’s a savings account, whether it’s an annuity, can really find a home in a lot of investor’s portfolios, because some people have a very difficult time with spending. So, I think that particular chapter, chapter seven, is specific to the government paying for all of our healthcare, the government, meaning the U.S. Federal government or your state.
And my contention is that while that would be wonderful and just be a terrific thing for us all to outsource the fear of healthcare spending ruining us, I don’t think it’s realistic. And over time, I believe that healthcare’s expenses will considerably exceed most Americans’ predictions, and they need to be prepared for that. So I guess I would leave it to your financial advisor whether forced savings products of any type are suitable for you.
Zack: Interesting point, because we even deal with our own clients, when we talk about mortgages as sort of a forced savings plan for certain people. I totally agree with you on that piece. “Your Stronger Financial Future” launches this week. It’s eight essential strategies for making profitable investments. We can find that on Amazon?
Mike: Amazon, Barnes and Noble, I believe McGraw Hill puts it pretty much anywhere you can think of.
Zack: Great, and one last question I ask all guests on the show: are there other resources that you find useful, I guess, if people want to dig in to your book and do some extra legwork that you could point them to, that you think are valuable? They could be online or offline resources, like certain media or research platforms.
Mike: Yeah, that’s a great question. I write a blog very regularly called MacroMike.com. I go to a number of different websites and comment on articles written by those bloggers or those writers. I think it’s important not to be focused on one particular site, even if it’s a very well-known site. I go to the major newspapers and major sites, but I wouldn’t encourage a reader to lock on to one particular site, Zack. I would encourage a reader to perhaps Google the idea of retirement planning or the idea of savings and then go through and find what is the most useful to others. Because let’s face it, after awhile, if you keep going to the same site or the same source, it begins to be a little bit like watching TV and you can become passive. If there’s anything I want to say to my readers, you can’t afford to be passive. You must be proactive. You must be responsible for your stronger financial future.
Zack: Mike, thanks so much for your time, appreciate it.
Mike: Zack, it was a pleasure. Thank you.