01 Jul Butter Churns & Wagon Trains
“People who begin sentences with “I may be old-fashioned but – “
are usually not only old-fashioned but wrong.”
– Robert Benchley
Once upon a time, if a person wanted to travel cross-country, they hitched up the horses, headed down a muddy path, and asked locals for directions along the way.
Along came automobiles and all they had to do was buy an atlas, map out their drive, and hope they’d chosen the best route.
Eventually, the internet brought us MapQuest. With MapQuest all you had to do was enter a starting point & destination, then MapQuest would print out turn-by-turn directions on the most efficient route. This was a huge improvement over using an atlas.
Nowadays, we type our destination in a GPS system and our vehicle gives us turn-by-turn directions, guides us around traffic jams & road construction, auto-corrects if we miss a turn, suggests stops along the way, and makes road travel super easy. It is a remarkable advancement over MapQuest, lightyears beyond an atlas, and incomparable to asking locals for directions.
Self-driving vehicles are now on the roads, making it highly likely that sometime soon all we’ll have to do is tell our vehicle where we want to go and then sit back while our vehicle takes us there.
Just as road travel technology has improved and relegated the old ways to museums, so too has financial planning and asset management improved. Unfortunately, instead of relegating the old ways to a museum, advisors and customers are clinging to antiquated ways of managing money instead of capitalizing on new research and technology.
For instance, consider this idea, which I hear almost weekly from new prospective customers:
“I’m going to retire in 3 months, so I need to be very conservative with my investments. Maybe some cash, cd’s, and bonds.”
“Because I’m going to retire.”
“What does that have to do with how your life savings is invested?”
“I’ll be retired. I can’t afford to take risks in retirement.”
And on and on it goes, with the prospect doing their utmost to convince me that they need to be “conservative”. Eventually the conversation rolls around to:
“What do you need in order to feel safe taking some measure of market risk?”
“I need more time. If I had a long time to go, I’d be comfortable investing in the markets.”
“What’s your expiration date? What day are you going to die?”
Prospect: Staring at me with a very confused look.
“None of us was born with an expiration date stamped on our foot. We could die this afternoon. We could die 30 years from now. None of us knows. What we do know is that you’re 60 years old & the average American lives to be nearly 80 years old. We reasonably assume you have at least 20 years of life remaining. That’s a long-term time horizon.”
“But I’ll be retired?”
“What does that have to do with how your life savings is invested?”
Prospect: Staring at me again with a still confused look.
“Retirement isn’t death. Retirement is just the starting point of another phase of life … a very long phase. If you invest too conservatively inflation will eat you alive, you’ll begin consuming principle, and eventually you’ll run out of money long before you run out of life. What are you going to do when that happens? Have you made plans to move in with your kids?”
“But I’ve always heard you’re supposed to invest conservatively when you retire?”
“Once upon a time, Americans retired just a few years before death. Their retirement marked the beginning of a short-term time horizon, so yes, those people needed to invest in cash, cds, & bonds. Nowadays Americans retire 15, 20, 30, 40 years before death. Using the financial techniques our great-grandparents used doesn’t make any more sense than churning our own butter, lighting our homes with oil lanterns, or riding a horse drawn wagon cross-country. Just like we buy premade butter at the grocery store, light our homes with electric lightbulbs, and use GPS to drive our cars, we need to update our financial way of thinking.”
Prospect: A lightbulb goes off as a new thought crosses their mind; “So what do you recommend?”
“The average American will live to be nearly 80 years old, but that average includes infant deaths, young men killed in war, and so forth. In reality, the older we get the more likely we are to live to a ripe old age. That doesn’t really change until our late 80’s, when our life expectancy begins to get shorter & shorter each year. As a 60 year old, you are realistically looking at another 20-30 years of life & we need to manage your money for that time horizon.”
“But my mom … my dad … my grandfather … my great-grandmother … died when they were 66?”
“Uh huh. And they used outhouses, churned their own butter, and had a physician who thought smoking was a great way for your pregnant mother to control her weight. Things change. We live very comfortable lives nowadays, have regular access to a great diet, and our physicians recommend that we don’t smoke. My grandmother died of colon cancer in her early 60’s. When she was diagnosed in the mid-70’s, colon cancer was a death sentence. Now it is easily treatable with a very high survival rate. We just don’t live the lives our ancestors lived. There’s just not much chance we’re going to be scalped during an Indian uprising while we cross the Great Plains in a covered wagon.”
“O.K. If we don’t need a ton of cash, cds, & bonds, what do we do?”
“We build a plan specific to you & your dreams. That plan will tell us how your money needs to be managed. We update that plan annually & change our investing according to what you need to make your dreams a reality over the next 30 years.”
I just made up that conversation; pulled it right out of the air. Even so, I have conversations similar to that almost every week. And it’s factually correct.
What’s more; 41% of 65 year old men will live to be 85 years old. 20% will live to 90. That means 1 out of every 5 men will live another 25 years.
The numbers are even higher for women. 55% of 65 year old women will live to be 85. 32% will make it to age 90. That’s almost 1/3!
And marriage pushes those numbers even farther. 72% of 65 year old married couples will live to age 85. 45% will make it to 90. 18% will make it to age 95! Wow. Nearly half of married 65 year old Americans will live to age 90.
What this means is that you will likely have a very long retirement and you need to manage your money accordingly.
The old way of thinking says invest your money conservatively, then go sit on the porch, churn butter, & wait to die. If you aren’t going to sit on the porch churning butter & waiting to die, then why would you manage your money as if you are sitting on the porch churning butter & waiting to die?
Sapiat Asset Management is a fee-only, independent registered investment advisor, specializing in goal oriented, financial planning & investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.