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Did the Wall Street Journal Just Publish the Worst Financial Planning Advice Ever?

April 07, 2014 | About:

The Wall Street Journal’s April 4, 2014, "Wealth Effect" column certainly deserves consideration for this dubious honor.

I love the Wall Street Journal (WSJ) and read every issue. I hope someday they will publish one of my articles. When they put out horrible, and unsupported information it is the exception to the rule.

Author Brett Arends’ article was called, “How to Save Your Retirement.” It could do a lot of damage if people take it seriously and follow his directions.

Arends began with a simple concept.

  • Invest $100,000 in a typical retirement plan (IRA or 401k) at age 25.
  • Wait 40 years (to age 65).
  • See how much cash you have to retire on.

Mr. Arends quoted statistics from NYU's Stern School of Business that showed total returns on the S&P 500 from 1926 through 2013 at 9.6% annualized. Over that same 87-year period 10-year Treasury Bonds produced 5.0% each year.

Eighty-seven years is longer than most of our lifetimes. By definition, those figures include multiple bull and bear market cycles along with enormous variations in interest rates and economic conditions.

Using those long-term documented numbers Arends noted that standard industry assumptions project that a lump sum deposit would grow to about $1.2 million, adjusted for inflation. The raw numbers for that retirement account were not given.

Here are the projections for an all-stock or all-bond portfolio (using NYU's numbers) taken directly from the SEC’s website, Investor.gov. Both portfolios also assumed a starting lump sum of $100,000 with no further contributions ever.

Here is where the WSJ article went off the rails. The column went to great lengths explaining the difference between the definitions of mean, median and mode.

Arends stated, without any supporting data, “Even if you use those standard assumptions more than half the time you will end up with less than $750,000. And a lot of the time you will end up with less than $350,000.” He later added, “From $1.2 million to $350,000 or less — that is going to make quite a difference.”

Where was his mention that many people would be expected to do better than average? Why was there no talk about the raw numbers produced by simply achieving average results?

How many people would feel their retirements were threatened if they merely had $1.2 million (in today’s buying power) available to draw from, starting at age 65?

Arends had a pre-set, extremely negative point of view when he wrote his article. He feels that stocks and bonds are both currently overpriced and thus likely to return less than normal going forward. The remainder of his article set the stage for his stunning conclusion.

He advocated parking much of your long-term nest egg in cash (the historically worst performing asset class) to wait and hope for stocks to get cheaper and or interest rates to go back up.

Hope and change? That hasn’t worked out too well so far.

Arends concluded with a self-critique. He asked, “Is that 'timing' the market? Yes. Is it 'risky'? Yes. But so is trusting the 'averages'."

Really? A June, 2013, WSJ chart showed the wisdom of buying and holding an all-equity portfolio over various time periods. Those 10, 25 and 35-year periods all included the disastrous Crash of 2008.

If that doesn’t convince you of the folly of trying to time the market, check out Morningstar’s latest numbers showing asset class returns from 1950 through year-end 2013.

Worrying about fluctuating returns when you have a long-term horizon is the single biggest impediment to actually attaining true financial security.

Disclosure: I am heavy in stocks; I own no bonds

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.2/5 (5 votes)

Voters:

Comments

wescileppi
Wescileppi - 5 months ago

Dr. Price,

I absolutely agree with you. I am 100 % invested in stocks with a 20-25 year time frame. May I ask what you are investing in?

Dr. Paul Price
Dr. Paul Price premium member - 5 months ago

You can see two model portfolios that I run on www.MarketShadows.com. One is equities (long only) and the other covers my option writing activities.

http://marketshadows.com/virtual-portfolios/

tomesposito
Tomesposito premium member - 5 months ago

It would be great to have the WSJ writer comment on Dr. Price's article.

chompinchuck
Chompinchuck - 5 months ago

Most financial writings are published by those with as much investment experience and knowledge of financial history as a middle school kid does with life. They wake up one day and have these overwhelming thoughts and emotions that they think no one else has ever experienced. Then they go to press with them.

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