WSJ: Kansas Furthers Already Atrocious Market Myths

In the Sunday Wall Street Journal, at least the part they sell to my local paper, the Albuquerque Journal, Dave Kansas furthered the already atrocious myths of Wall Street (see "You Still Need to Be in the Market "). The writer, and author of “The Wall Street Journal Guide to the End of Wall Street as We Know it”, would suggest that he sees though the common myths that keep ordinary investors down. He doesn’t, and I want to take issue with five different parts of Dave’s advice.

First, Dave brings up the “rule of 110”. Wait a second, when I got into the business it was the rule of 100, not 110. It is an arbitrary rule of thumb for lazy salespersons to get you to subtract your age from 100, or I guess 110 now, to arrive at the ideal split of your assets between stocks and bonds. As if stocks and bonds are the only investments out there. It is telling that the number has been bumped to 110, so the industry can get more people to pile money into stocks for the long haul along with mediocre results and high fees.

Second, Dave says, “according to research data, stocks tend to return around 6% to 8% a year over the long run.” Whoa! He either didn’t do his research or he is talking about a really long time. If your time horizon is 100 years, no worries, but if is 20 years, you are in trouble. If we break down the last 100 years in 20-year periods, we get 88 periods. Half of those periods returned less than 4%. Also, over the past 100 years, less than 5% of those years ended with the market returning between +5% to +10%. The 6-8% return rarely happens except over very long periods of time.

Third, Dave states that stocks remain a better bet than “other options”. Could you please define what other options you mean? We are still guided down the Kool-Aid trail that the only other options are either bonds, which do return less over the same very long periods of time, and real estate. Why no mention of tactical allocations, alternative assets, or simply alternative strategies? Is the long-only mutual fund really the best bet?

Fourth, Dave presents another great lie about staying fully invested so not to miss the big up days. Well, I have news for you; it’s only half true. What we are never told is that the big days are usually followed by the worst days. If you miss them both it affects you less. I’m not suggesting that you should dedicate your life to the short-term movements of the market, but you should not be brainwashed by half-truths that don’t tell the whole story. Especially when the whole story would make you question the conventional wisdom of collecting fees for Wall Street.

Fifth, the article ends with gee-whiz times are tough for long-term investors, but just hang in there and, this is the best part, “stick with a long-term plan that includes a large role for the stock market”. Well, I half agree. I invest in strategies that include the stock market, but not just long or short. Perhaps the author is just trying to keep the general public calm and not question why their 401k is a mess. How can Wall Street pay back all those loans if you don’t keep following their corporate strategy of keeping you in the market as long as possible?

In the end, you do need to be in the market, but how you define the market is the key. Bull and bear cycles are long and both can either make you rich or destroy your assets. Dave Kansas is doing people a favor by suggesting they make a plan and stick with it; I am just highlighting some problems with the conventional assumptions he mentions.

Comments

[Respirate:]

Thanks for the good article, Mr Munson.

The article you mention is from WSJ, which is going to be largely pro-stock market no matter what. It often ignores alternatives you mention.

It's a general purpose article intended for those who get their investing advice from the Sunday paper. Presumably many of these folks are not going to be day traders or nimble, "tactical" market players. The advice the article gave for them, to hold a portion in equities, may not be as bad as it appears.

An alternative rationale for upping the 'rule of 100' upped by 10 may reflect the steadily increasing life spans of retirees.

Thanks again for the interesting article ... it's good to see someone take issue with the often weak information disseminated by WSJ.

Mar 24 08:39 AM

[Vox Rationalis:]

"First, Dave brings up the “rule of 110”. Wait a second, when I got into the business it was the rule of 100, not 110... "

This is blatantly misrepresentative. Kansas in fact brings up the so-called "rule of 100" in the paragraph prior to the one containing 110: "A good rule of thumb is to use your age to determine how much you should have invested in the safer assets, such as funds holding Treasurys and highly rated corporate bonds. If you are 50, then you should have 50% of your investments in stocks and 50% in Treasurys or other high-quality bonds. If you are 70, then you have a 30%-70% mix of stocks and bonds."

"It is telling that the number has been bumped to 110, so the industry can get more people to pile money into stocks for the long haul along with mediocre results and high fees."

I guess you're contending that age-based allocation models between equities and low-risk bonds are bad. So, do you have a problem with the Vanguard Target Retirement Funds, which have fees and expenses on the order of 0.2%/year (or $20 per $100,000)?

"If your time horizon is 100 years, no worries, but if is 20 years, you are in trouble. If we break down the last 100 years in 20-year periods, we get 88 periods.

How do you get 88 different 20-year periods from a 100-year period? I can see 80 easily - the first is from 0-20 years, the last is from 80-100 years. But 88?

"Half of those periods returned less than 4%. Also, over the past 100 years, less than 5% of those years ended with the market returning between +5% to +10%. The 6-8% return rarely happens except over very long periods of time."

I think your data or analysis is faulty. According to data from monkeychimp.com (attributed to Robert Shiller), here are the inflation-adjusted annual returns for the 80 20-year periods in the last 100 years (ending with 2008):

0%-2%: 25 (31% of periods)
2%-4%: 8 (10%)
4%-6%: 7 (9%)
6%-8%: 16 (20%)
8-10%: 11 (14%)
10%+: 13 (16%)

Other ranges you mentioned:
0-4%: 41% (not more than 50%)
5-10%: 37.5% (not less than 5%)

Mean: 6.37%
Median: 5.88%

If your data is different, please provide your source.

"Third, Dave states that stocks remain a better bet than 'other options.' Could you please define what other options you mean?

Did you miss the part where he wrote "Fixed-income returns are usually less... 10-year Treasury bonds currently yield less than 3% and highly rated corporate bonds slightly more... your home has returned about 3% a year over the past century..."?

"Why no mention of tactical allocations, alternative assets, or simply alternative strategies?"

Probably because (a) they are beyond his target audience, and/or (b) he doesn't believe in them. I guess they're beyond me too, since I don't know exactly what you're talking about. By the way, do these result in higher "Wall Street" fees, which seem to be a focus for your scorn?

"Fourth, Dave presents another great lie about staying fully invested so not to miss the big up days... the big days are usually followed by the worst days. If you miss them both it affects you less."

If you can't time the market, clearly staying in is better than staying out.

"...you should not be brainwashed by half-truths that don’t tell the whole story. Especially when the whole story would make you question the conventional wisdom of collecting fees for Wall Street."

I see the term "conventional wisdom" most usually used to describe a buy-and-hold strategy. How does buy-and-hold boost Wall Street fees?

"Perhaps the author is just trying to keep the general public calm and not question why their 401k is a mess. How can Wall Street pay back all those loans if you don’t keep following their corporate strategy of keeping you in the market as long as possible?"

Now you're questioning the author's motives, which is a mistake. I don't know much about Dave Kansas, but a five-second search reveals that he was an editor at the WSJ and has written a book called "The End of Wall Street as We Know It."

What exactly did Kansas write that leads you to think he's trying to maximize "Wall Street" fees?

Mar 24 09:47 AM

[Lee Eugene ...:]

Chistletoe - Maybe you're right; I'm still agnostic about "end of growth" narratives, and I'm inclined to think we're still a ways away from the end if it does come. That said, even if total growth just stops, it doesn't mean there won't exist stocks and bonds that will perform well. They just need to be picked smarter. Just to hypothesize, the overall size of the stock market could shrink, but the remaining stocks in it could do even better.

Thanks for reading.


On Mar 24 08:25 AM chistletoe wrote:

> The key to Wall Street's sales pitch is
> the very basic assumption that over the long haul, growth is inevitable.
>
>
> Now that the planet has reached or exceeded the maximum human population
> which it can support, and food and water supplies are threatened,
>
> now that oil and other forms of energy have reached and passed<br/>their
> peak production,
> this is a highly suspicious assumption.
>
> for generations to come,
> one can reasonably predict economic retraction.
> Where, then, should one invest?
>
> Not stock. Not bonds.

Mar 24 02:12 PM

[Lee Eugene ...:]

Thank you, Respirate. My worry is that articles like this are not really about helping people recover their savings, but about keeping a dying business structure--Wall Street--on life support by means of more and more of those same people's savings, when this part of the economy is really in dire need of creative destruction. Not the sort of thing the potential retiree wants to be a part of.


On Mar 24 08:39 AM Respirate wrote:

> Thanks for the good article, Mr Munson.
>
> The article you mention is from WSJ, which is going to be largely
> pro-stock market no matter what. It often ignores alternatives you
> mention.
>
> It's a general purpose article intended for those who get their investing
> advice from the Sunday paper. Presumably many of these folks are
> not going to be day traders or nimble, "tactical" market players.
> The advice the article gave for them, to hold a portion in equities,
> may not be as bad as it appears.
>
> An alternative rationale for upping the 'rule of 100' upped by 10
> may reflect the steadily increasing life spans of retirees.
>
> Thanks again for the interesting article ... it's good to see someone
> take issue with the often weak information disseminated by WSJ.

Mar 24 02:51 PM

[baird:]

Yes and the 6-9billion unit gorilla no one will talk about is global population. While it's true that population trends in the developed countries are flat to down most of the world is undeveloped where birth rates are high and death rates are down. The argument that after the planet is all "developed" population will stabilize is specious at best, by that time we're all cooked.


On Mar 24 08:25 AM chistletoe wrote:

> The key to Wall Street's sales pitch is
> the very basic assumption that over the long haul, growth is inevitable.
>
>
> Now that the planet has reached or exceeded the maximum human population
> which it can support, and food and water supplies are threatened,
>
> now that oil and other forms of energy have reached and passed<br/>their
> peak production,
> this is a highly suspicious assumption.
>
> for generations to come,
> one can reasonably predict economic retraction.
> Where, then, should one invest?
>
> Not stock. Not bonds.

Mar 25 02:21 PM

[Vox Rationalis:]

What, no scathing reply to my criticism here?

Mar 26 11:46 PM

[chistletoe:]

The key to Wall Street's sales pitch is
the very basic assumption that over the long haul, growth is inevitable.

Now that the planet has reached or exceeded the maximum human population which it can support, and food and water supplies are threatened,
now that oil and other forms of energy have reached and passed
their peak production,
this is a highly suspicious assumption.

for generations to come,
one can reasonably predict economic retraction.
Where, then, should one invest?

Not stock. Not bonds.

Mar 24 08:25 AM