Critical Lessons From the Crisis
To borrow the format of the catechism I remember from
my youth:
Q: What should I invest in?
A: You should invest mainly in a broad selection of equities (e.g.,
60 percent to 70 percent of your money) and put the rest in
a bond portfolio.
Q: Why should I invest in equities?
87 years and the longest bear market in history was in the 1930s
when, even then, companies paid rich dividends that provided
decent income, the earliest she should think about boring bonds
would be close to retirement. And as for collective pension
funds with their constant inflow of young blood, why ever worry? (Except, of course, about enterprise-strangling accounting
rules inflicted on the sponsoring employer.)
A: Because, over the long term, equities have proven to be a
superior source of investment return.
Q: Why should I put some of my money in bonds?
A: Because, on a few occasions, the equity market experiences some serious dips, and at those times bonds can provide
some valuable stability.
At this point in the lesson, some restless child in the back
pew raises her hand and asks, “But if I’m saving for the long
term, why do I care about the occasional dip? Why wouldn’t I
put all my money in these higher-performing equities?”
I would argue that our investor education is flawed, relying
on received wisdom that doesn’t withstand deeper scrutiny. I
don’t argue that a mix of equities and bonds isn’t right; I believe
it is right. But our explanation too often encourages people to
choose an inappropriate mix that subjects them to retirement
by roulette. To misquote Oscar Wilde, the truth about equity
investment is rarely pure and never simple.
Before October 2008, what would Sister Teresa reply? She
might say something about the possibility of a protracted bear
market and the potential need for early liquidity. However, our
precommunicant doesn’t feel satisfied. If her life expectancy is
If we are asking workers to take responsibility for their
retirement savings, we must provide the right educational
framework. Investing for retirement isn’t easy to understand,
but it shouldn’t be the sole province of academia. It should be
taught in high schools, and workers should be given full training courses that are both erudite and (tolerably) entertaining. I
also believe that all investor education should require the money management industry to remain on the other side of
the school gates (or church doors, to belabor
my metaphor).
The Seeds of Generational
Disillusionment
The need to rethink investment
education is immediate. A whole
generation is becoming disillusioned with the stock market.
It’s frequently pointed out that
returning to the Dow 8000s has
negated investors’ earnings over
a decade. In fact, the situation is
much worse. Because regular savers
invested much of their money during
the market upswing, the return to 1998
levels has lost them serious money. (That,
by the way, is the fruit of another piece of
received investor wisdom, peculiarly known
as dollar-cost averaging.) Investors who diversified into international markets and commodities
when these sectors became most popular fared even
worse. Japan provides a historical warning to us. Its painful
