There is no doubt, that the Baby Boomers have been hurt the most by this economic downturn & crisis. Nearing or early into their retirement, most had a significant amount of their retirement savings parked in mutual funds tied to the stock market. With the crisis, they saw the market value of their investments down over 50%-70%. They were relying almost solely on cashing out those investments for their retirement.
The timing of which would have been right about now, as well as the past year or two, and two to three years from now. With little market value left, it leaves their retirement with very little money. Its far from the poster that is found plastered in every financial institution, of the golden goose egg sitting in the nest. They were lead to believe their investments would become. Many are now lining up for welfare, old age assistance, thinking of rejoining the workforce, putting off retirement for a few more years, or scraping the bottom of the barrel just to get by the last years of their life.
THE RISE OF THE BABY BOOMERS
Having been born after the Great Depression and WWII, they were taught by their parents the value of a dollar, hard work, earning rather than entitlement, conserving, saving, and spending wisely. In the late 1960’s and early 1970’s the Baby Boomers started working in the corporate world, and spurred economic productivity around the world. They started buying cars, houses, clothes, consumer products, etc. They saw the world improve and expected it to continue to improve. By the end of the 70’s inflation had risen significantly along with interest rates and oil prices. And with all economic booms, followed an economic downturn, the 1980 credit crisis. Banks were in trouble, and housing prices tumbled. This was their first real taste of a significant economic downturn.
THE THIRST FOR MORE INFORMATION
Having been one of the first generations that were able to attend universities & colleges, they were a more formally educated generation. They wanted to know what was happening, and the demand and hunger for business & economic news grew like never before. People who never had an interest in it, started hearing financial & economic information & terms being used in conversation, and wanted it all to be explained. TV channels, magazines, and radio talk shows, multiplied to give up to the minute information and commentary. The world of business & economics became a new spectator sport. People would talk about interest rates, GDP, debt, trade, unemployment numbers, commodity prices, etc. But as in most cases, when something becomes so popular, quality is diluted to increase the quantity for the masses. There was more information, but not better information. And with so much information coming from “professionals” & “experts”, that had degrees, formal education, and jobs at financial companies, very few questioned what was being said.
IMPORTANCE PLACED ON THE CAREER ITSELF
Their generation were also ambitious corporate ladder climbers who were serious about their careers. More women also wanted a career of their own. The status of being a corporate white-collar employee became important. They did not want to be independent entrepreneurs, local business owners, skilled laborers, or tradesmen like many of their parents. Many of them excelled in their careers and their dreams were being fulfilled. They worked for a good reputable company. They had houses, families, cars, vacations, etc. And as the 80’s recession ended, the markets and economy grew and rose to new levels. Even with the recession in the early 90’s, the Boomers have experienced the greatest economic ascent of the last 20+ years. The vast amounts of financial information available to them and larger incomes gave them a liking towards investments rather than just savings. However, they placed a very high importance on their career and became too busy with it to spend time or effort investing. And with this, banks and investment firms, found a new opportunity to grow their revenues & earnings aside from their regular deposit & mortgage businesses. Because everyone was trying to ride the great bull market, this laid the foundation and basis for the greatest growth of investment funds & products. As the economy grew, more Baby Boomers demanded such products & services, that provided the convenience and ease to invest.
With so much knowledge or awareness of financial events taking place each day, the large number of services & products available, they were armed with information & opportunities that their predecessors never had.
So how did it come down to this?
NOT BEING ACTIVE ENOUGH
With so much information, it is difficult to differentiate what is true/accurate and what is not. There is difficulty filtering out useful information due to lack of skills, knowledge, experience (as a result of becoming a spectator). The Baby Boomers left all the investing to the Wall/Bay street managers. They disconnected themselves with all that is important and necessary for investing, while still buying investments. That means they exposed themselves to the risks without being fully able to properly assess the risks and the impacts to their own personal financial & life situation. They also associated investing with only one aspect of it, the purchasing of investments. Roth IRAs, 401ks, & RRSPs made people who were not investors, believe they could invest and easily become investors simply by purchasing investments. They didn’t have a plan, and allowed the bank advisors to tell them what their only “realistic” & suitable plan was …to continually contribute/purchase investment products for their retirement “plans” and diversify within them. That was the nail in the coffin that slowly & quietly sank in. These few related issues combined, were the biggest mistakes, which started the chain of events.
Anyone who trains seriously in a particular sport, knows that there is a huge difference between spectating, and being immersed in the sport itself as an athlete. Certain skills, knowledge, real-time decision making, experience, adaptability, risk analysis, cost-benefit, planning, are all learned and simply cannot be accumulated through discussion and spectating alone. The exact same is true for investing. You can’t invest without planning, knowing what you are doing, and without putting in the actual effort.
The Boomers have a reputation of being a generation of hard workers who earned everything they have. They believe in doing things themselves and the importance of learning. Its only with investing that they didn’t do what they have done with everything else in their life. They were convinced it was alright not to actively participate in investing and all the necessary things associated with it.
Throughout my years of Muay Thai & kickboxing, I have drawn the similarity between life and a fight. But just like a fight, you need to enter the ring prepared. You cannot spectate and be part of the fight at the same time. Such a combination will result in serious injury and even death.
But that’s exactly what has happened. The majority were lead to believe that it would somehow be okay and actually be a good idea. They were asked several profiling questions, told there will be small risks, showed graphs, told that if they just keep moving around in the ring long enough everything will be fine. Basically they were lead to believe that they could win without doing much, just by buying the right gloves & gear. They were hooked up with a professional manager, who took care of setting everything up and finding the right variety of gear. They got into the ring without a good plan, and without any training, experience, or knowing exactly who they were matched up against. They weren’t fully aware of how things worked.
The banks & investment firms enticed people to invest who perhaps shouldn’t have (not really able to, or not ready to), by giving easy access to investment funds (anyone can invest if willing to put down money). They allowed people to invest into the stock market and equity, without a good understanding of the underlying investments themselves or how the market works. People should not invest in investments which they do not understand or do not have enough knowledgeable about. They have to be able to determine if it is a suitable investment. But that is what the investment funds have allowed & encouraged people to do without fully realizing it. People who had never been properly educated/trained in financial/business/investment matters, started taking money that should have been destined for savings and put it into investments. They also took money out of savings to purchase investments, leaving them with little or no savings (a financial mistake, everyone must have savings).
Why did they think this was okay? Perhaps because everyone was doing it, and they didn’t want to be the only one without the “golden nest egg”. And with recent bull markets, the value of their funds increased, giving them confidence that they were good investors. Everyone wanted to be a part of that success. But one of the main reasons was because the outcome would occur only later on in life. Since all the Boomers are around the same age, everyone signed up to it and started at about the same time. They didn’t know of anyone who had actually gone through the entire “plan” yet, so there wasn’t much news of people losing money. Unfortunately, it would happen to the majority of them at roughly the same time.
Most Boomers have gotten knocked down twice during the fight already. They took a tech busting hook in the second round. But with great resilience, they were able to get back up with enough energy for the third and final round. But in the middle of the third round they were knocked down once again, suffering a real estate & financial bubble busting kick to the head. Needless to say they are bloodied, battered, bruised, and now in self doubt. Panic has set in because they don’t know what to do at this point. They thought they could just leave the investing to the “experts”. Remember just because someone is paid to do it, or has an office downtown, and wears a fancy suit, does not mean they do what is in your best interests. Make no mistake, their number one priority is to maximize corporate profits to their companies. The companies’ number one beneficiary is their shareholders, and we have even seen that changed to being the financial well being of the executives themselves. I was told on numerous occasions prior to 2007 and even as late as late 2008 (after billions was already lost by the banks) that my views were absurd. Benjamin Graham (Buffett’s teacher) in his book Intelligent Investor gave historical examples of fund managers who invested when prices were overvalued, or did not resist the institutional imperative, or would do what would make their performance look better. History is filled with dishonest fund managers as well. This is not to say that all are, but there are enough out there to make it significant. Its always absurd until its plastered all over the news and reports yet again (Madoff, Stanford, Bank exec bonuses, professional fund managers lacking knowledge, etc). Usually by then its too late. Everything the Boomers have been told feels like a lie to them. They did everything they were advised to do, “buy more” “professionally managed funds” & “diversify” (within the same asset class).
There is no point in diversifying if the investment does not offer a genuinely different source of investment return! Warren Buffett said that for investors who know what they are doing diversifying does not make much sense. As we have seen diversification has not shown to provide much safety from investment losses. Pension funds around the world have diversified but have still seen massive losses requiring government bailouts. California Public Employees’ Retirement System, America’s largest public pension fund shrank from $253 billion at the end of 2007 to $181 billion in November 2008.
GOOD FOR BANKS & INVESTMENT FORMS, BAD FOR THE BOOMER & AVERAGE JOE
Having also studied marketing & strategic planning, I can see what the banks & investment firms may been trying to achieve, and how they did it through their investment products & services. From this perspective it gives us some insight into how it lead Boomers & the Average Joe to believe they could just leave investing to the fund managers & continue blindly purchasing the investment products:
New and rapidly growing revenue stream from investment products & services:
– Commissions, fees, for managing your money/investments.
– Don’t tie 100% of fees & revenue directly to performance.
– Commissions & fees built-in.
Down play negative aspects (fees, risks, etc):
– Always shown as a insignificant percentage when compared to the expected/potential large gains.
– Make them a small detail or in fine print, while promoting other aspects.
– Market fund diversification as the solution of managing risk.
Image of safety:
– Sold only by professionally licensed brokers.
– Professionally managed.
Image of success:
– Fund/investment managers with history of investing, etc.
– Historical returns (as a reason for likelihood of future returns).
– Make it seem like if you buy from them, it will be a successful investment.
– Associate the word “investing” with the single action of purchasing an investment.
– Slot everyone into a category by profiling each customer. Create a product line with an investment product in every category. Now there is an investment product “suitable” for each customer.
– Market mutual funds as the best investment product.
– Market mutual funds as a must have for retirement, and education (401k/RRSP/RothIRA, RESP products).
– Market contributing in funds as a “retirement plan”.
– Allow investments to be made in small denominations (anyone can afford to invest at almost any time).
– Have financial planners/advisers focus more on sales, than on planning and financial matters.
Promises and hopes:
– Wealthy future
– Comfortable retirement.
– Freedom at age 55.
Exploit human laziness:
– They do all the work, you get most of the money. Hassle free. Sleep easy.
– If you don’t have mutual funds you won’t be able to retire.
– “Help” you invest by buying their investment products. Not on your own.
Exploit herd mentality:
– Everyone has one, do you want to be the only one who won’t be able to retire at age 55?
Exploit desires (greed & generosity):
– Money for future vacations, cars, houses, boats, golfing, affluent lifestyle. Money for grandchildren’s education, helping kids buy their first home, etc.
for people to (hassle free, play on human laziness, play on desires).
The depressing fact is, very few, if anyone became a millionaire from the plan of purchasing & diversifying mutual funds. As you can now see a big part of the problem is the way investment products (not only mutual funds) were and are still being marketed. Most investment products offered are not a bad products themselves, but people need to understand them and their limitations. People selling funds usually show nice graphs steadily rising over a very long historical time horizon, which lured millions into dumping their life savings into these mutual funds as the magic product/solution that will one day allow them to retire comfortably. They also have different funds for different profiles, which made the funds “plan” seem suitable for everyone. The focus and knowledge that used to be held by financial planners/advisers moved away from planning and financial matters, and became focused on sales. This was not the fault of the individuals, but of the institutions and investment firms, coming straight from top management. Retail banking became just that, retail & sales. They became sales people who gave the impression that they were investors. So called “investment advisors/planners” were no different than the financial planners/advisors, they just had a different name to make it seem like they were investors. People need to realize that investments are merely tools as part of an investor’s toolbox, that can or cannot be used. They may or may not be a suitable . However, purchasing investment funds is definitely not a plan. They also set up automatic contributions, making the entire process effortless on the part of the average Joe. The problem is, you can’t expect to get something by doing nothing. You need to be the one in direct control of your investments. But more importantly you have to be the one to lay out the plan. By being passive, or a “lazy investor”, you allow things to happen for better or worse. But by being an active investor, you can determine which investment tools, and when, they are the most suitable for your plan & goals.
WHAT SHOULD THE BOOMER & AVERAGE JOE DO NOW?
Markets will recover. True, but it DOES NOT mean all investments or mutual funds will recover to a market price that allows the holder to break even. And it is little comfort to the Boomers who know this all too well. They are reminded when they look at recent market prices of their technology focused mutual funds, even during the most recent record highs of the stock market. They held onto them for years hoping they would eventually recover in time for their retirement. It also doesn’t tell us when they will recover either, which is crucial as the money may be needed to sustain life expenses.
So what can be done now that the investments have been wiped out almost completely?
As always, you are the only one that can help yourself. Unfortunately the current circumstances for Boomers means that age will play an important factor. Obviously the older you are the less time and energy you may have. But it also depends on your goals, which you define for yourselves. These goals also take into account your age, your desires, amount of time you wish to spend, how much energy you have to accomplish your goals, as well as other personal situations. The solution and game plan is really going to be self-tailored to you, as everyone’s situation is different.
You can reinvent yourself and take control. Boomers may not be able to completely, depending on their age & health factors, in which case their children may play a larger role. But why do I think people should put in the effort to do this? Because the banks & investment firms haven’t stopped milking everyone. Their marketing departments have been working overtime to crank out their new game plan. They are trumpeting new products, services, slogans, & gimmicks to make up for their corporate profit declines, again at the expense of the average Joe and Baby Boomer.
Here are just some of the new marketing ploys that are being advertised with so much effort these days in an attempt to make you think that these are the best and most suitable products & services for everything & everyone:
– High interest savings accounts – Rates will be reduce a few months down the road. Its to get you in as a customer first.
– Tax Free Savings Account (Canada) in conjunction with a GIC type product – Without looking at the consumer’s tax situation they recommend opening a TFSA and purchase a locked-in GIC totaling the entire $5000 contribution limit. Probably not the best use of the TSFA tax incentive. I know many old folks who unfortunately did this already.
– Playing on fears and promoting their risk free investment lineup, knowing that people are now risk-adverse.
– Self-promotions as the bank or firm that can help you a second opinion, or re-evaluate & re-build your portfolio. Everyone will just be playing blind-folded musical chairs again.
– Index Funds & Exchange Traded Funds – Low risk, low fees, passive, hassle free, since market is bound to recover. Marketed as the new “sure bet”, better than mutual funds and stocks, suitable for everyone, make money by doing nothing. They do this without explaining the principles behind the market and efficient market theory.
– Perhaps the biggest gimmick in general is marketing investment products & passive investing through them, as the only realistic retirement plan that will lead you to prosperity.
ASSESS YOUR INDIVIDUAL SITUATION
Don’t panic. When panic sets in, irrational & illogical decisions are made. Those decisions are usually based on emotion & fear, and result in eventual investment losses. For the average Joe I suggest you read How To Start Investing I. There will be a lot of self-assessment that needs to be done that is also covered in that article. I strongly suggest learning before assessing whether you should move or change any of your current investment holdings, as doing so may not be necessarily beneficial. After gaining, more knowledge, you can better assess what to do with your current investments, and how to proceed going forward.
For Boomers I suggest going through the list below before reading the article, as the situation is a bit unique. It may seem late in the game but its possible in a short amount of time to pick up adequate investing skills to make it worth while. Again, it depends on the individual (determination, motivation, etc.). The reputation of the Boomers lead me to believe they have enough energy to get through it. But what they decide on next is critical. Make no mistake about it, it won’t be a free lunch. There are no more rounds left in the fight, its now or never. Each person is different. Each must really take a moment to decide whether they want to just merely survive the round? Or do they have enough energy to last the round while trying to score some points? Or do they have enough energy to try and go for a knockout of their own?
What is the situation, and what do you want to do? Here are some things to think about that will assist in deciding upon & developing your goals, and determining a realistic plan of action:
– Retirement – How many years left? or already retired?
– How much time is left?
– What is the current financial picture?
– What do you need, what do you want?
– Taking account of your current situation, and personal life circumstances, what is doable?
– Do you have the energy & drive?
– Do you want to put in the effort required for the goal? If not you need to rethink them.
– What are you willing to give up? I know you’ve already given up much more than you should have, but unfortunately this is what is has come to. Time? Possessions? Your Saturday trip to wherever? etc.
– Willing to hold off on retirement for a few years?
– Willing to reading book, newspapers?
– Willing to learn little by little, and make some mistakes along the way?
– Raising capital might be necessary for some people (come out of retirement for a part time job? sell some possessions? downsize?, etc)
– What will be the role of your children? Can they help manage finances, contribute financially, live together?
Everyone has always told you it would be a lot of work, too much to do, or that you need to know a lot of financial information. That is not necessarily true, one can learn without much progress-blocking difficulty, it just takes a bit of time & effort. Banks & investment firms, and the majority of people always say that its better left to someone with a university background & certifications who does this full time. In most cases it is not true, although there are exceptions. They also mention that investing (yourself) is risky. Anything is risky, if you don’t know what you are doing. This is also the same thinking that got people here in the first place! Doing it again, isn’t going to change the result or the result of the majority. The fact is that the best person to handle your personal financial interests is yourself. You just need to start acquiring the knowledge, skills, and mindset to do it.
Because this week’s topic is so important I’ve spent many evenings working on it. It has affected many families, and unfortunately even people I know. Some of whom also asked me for some necessary & important advice on what to do now. So this article, which was originally intended to be two articles, is now posted in its entirety. I hope it will help to change the direction of people’s retirement to a positive one. Please note, that I give my honest opinion & assessment without reservation in order to illustrate the root causes of the problem, which is necessary to understand the solution.
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Thanks & Happy Investing! — The Investment Blogger © 2009