Family Update
We bought a Tesla. Everyone I know who owns one says the same thing: they'll never buy another car. The technology really is remarkable. I enjoy the ability to hit an app on your phone and climb into a car that's already cool. Still, there's a part of me that misses the simplicity of driving my minivan and having total control. Ten years from now, I have a feeling transportation will look fundamentally different. I drove from the airport all the way to east of 75 and never touched the steering wheel.
Chris made it home last week after a solid first stretch of classes, and it was good to hear him singing in his room- a sure sign he was happy to be back. Of course, home also means the usual back-to-school virus explosion. Every year it's the same story: the kids all come together at their schools, and illness spreads like wildfire. One has already made its way through our house, and it's just as annoying as ever.
This week brought one of the worst feelings in the world: reaching into the freezer for a bag of peas and finding them soft. Our refrigerator had stopped working, and with replacements not cheap, we braced for a rough situation. Thankfully, the appliance guy found a simple fix, but not before we'd crammed every refrigerated item into the garage fridge, sacrificed some food we just couldn't fit, and dealt with a general kitchen mess for a few days.
Sam and Sarah Mayer, ages 83 and 85, visit a local financial advisor.
"Sonny boy," Sarah says, "we have $500,000 in the bank, and it's making basically nothing. We were wondering if we should invest it in something."
"Well," he says, "you two are pretty darn old. I guess we can't put you into anything too risky. The standard rule is you subtract your age from 100, and that's how much you should have in the stock market. So maybe 15% in stocks, and the rest in conservative bonds, money markets, and a fixed annuity or two."
Sam nods. "Makes sense. We don't have time for our money to recover if the market crashes. We don’t even buy green bananas anymore!"
Sarah adds, "This money will go to our grandson anyway; we are so happy to bless him with it. He gave us three great-grandkids."
So Sam and Sarah go with the super-conservative portfolio and head home, never realizing they've just made a terrible, expensive mistake that will forever affect their great-grandkids' lives. In fact, the youngest, Joey, won't even be able to go to college. His father will end up having to work until he's 90.
The problem with "getting more conservative with age"
This story captures an idea I've pushed back against for years: that as you get older, you need to get more conservative with your investments because you "don't have time to make it back." I think this idea is not only wrong, but it's also often costly.
Here's why it doesn't hold up.
Markets recover fast. Even at 100% stocks, the worst historical recovery times have been three or four years. So "we don't have time for this to recover" only makes sense if you assume both Sam and Sarah will die within the next three or four years.
That's possible, of course. But even if they did die, there would still be tons of money in the account. It's not like it's going to go to zero.
Let’s even look at a 70% stocks, 30% bonds portfolio instead. When stocks fall, bonds tend to rise and cushion the loss. Over the past 50 years, the worst year was 2008, a 24% drop. Painful, but not close to ruin, and that portfolio recovered in a little over a year.
Whose money is this, really?
Here's the real point I'm trying to make. There's a very high chance that Sam and Sarah will never spend close to all their money. They're content with their lifestyle. They don't want more stuff. Their budget isn't going to grow.
So what is this money actually for? Whose is it, really?
It's their grandson's. There's a strong chance most, or all of it, eventually goes to him. Which means the real question isn't how Sam and Sarah should invest for themselves. It's how they should invest on their grandson's behalf, since he's the one who will end up with it.
Some in my industry would call that blasphemy. The industry is wrong. I'm not sure why, but it loves to pigeonhole older people into ultra-conservative portfolios when there is no data or logic to back it up.
By investing according to their own ages rather than their grandson's, Sam and Sarah are quietly costing him money. A lot of money.
What it actually cost them
Say this conversation happened in 2015, and both Sam and Sarah lived to 2025.
At 15% stocks / 85% bonds, that $500,000 would have grown to roughly $720,000. Not bad, and certainly better than earning 2% at the bank.
If they had invested the money in the markets, it would have grown to over $2,650,000.
I believe strongly that almost everyone, regardless of age, should have at least 60-70% of their money in the stock market. Look at decades and centuries of history. Subtracting your age from a hundred is just plain silly.
Be Blessed,
Dave