As detailed in the first two articles in this series, bad thinking creates bad habits. The myths that prevail in today's thinking about managing personal finances and building personal economies lead to financial disaster. In this article, we'll examine the next two myths in the series.
Myth No. 4-- I have a retirement plan from work
Myth: My company has a pension/profit sharing/401(k)/other plan that promises me a secure future income.
Reality: Enron, MCI, US West/Qwest, Mutual Benefit Life, United Airlines and many other well known and superficially reputable and stable companies have defaulted on retirement plans in the past, and many more will do so in the future.
Banks, investment firms, and automobile companies as easily recognized as America itself, as well as many other businesses, are embracing bankruptcy and the elimination of pensions and other retirement plans in the process.
I am not predicting an endemic financial catastrophe in America beyond what we have already seen. However, it is imprudent to rely on the good will of a corporation whose only justifiable objective is to make a profit for its shareholders, even if it means adversely affecting the lives of its employees.
Remember, only money -- and not people -- shows up on the balance sheets and the earnings statements of public and private businesses.
"Wait a minute," you say, "my company has a long history of taking care of its employees and I believe that it will take care of me." Well, that may be so. If you truly believe that then, as you prepare for the future, you can incorporate that belief into your equations.
I suggest, however, that you don't rely on that as an inviolable truth and a changeless premise of your personal economy and financial plan. You must also prepare for the possibility -- regardless of how remote you may think it is -- that your future income from your employer's plan may not be there at all or may be less than current projections would indicate.1
There's another false premise in retirement programs and the way we talk about them in the current paradigm. Have you ever heard that you should contribute to your retirement plan today, because you are in a higher tax bracket now than you will be when you retire? Indeed?
If you are successful, the same person who tells you this falsehood will next tell you that if you follow his or her program, you will have this incredible amount of money to create retirement income. Guess what, if they are correct, you will find yourself in a higher tax bracket with no deductions to offset your income.
Which is true?
All tax qualified retirement plans have strings attached and most of the time, in the end, they generate more money for the IRS than the tax collectors give up in revenue they lose to current deductions.
Myth No. 5 -- My investments will carry me
There is a belief prevalent among American investors that "staying the course" in the market is wise. The theory is that over the long-term, if you ride out the low times your portfolio will increase with the general trend of the market and you will be OK.
Compare that with the reality that Wall Street averages showed no gain at all for almost half of the 20th century. Consider also that only a handful of the million-dollar-per-year money managers of the nearly 17,000 mutual funds earned their investors even 1 percent during the two recent bear markets.
In other words, the professional money managers with their analysts and researchers working full time at very high salaries (many earn over $1,000,000 per year to manage our money in mutual funds) lost money.
Do individual Americans who are doing a thousand other things every day to earn money, care for their families, attend their churches and synagogues, play or support kids who play softball, basketball and soccer, ski, and on and on -- do they have the time, energy, resources, insight, wisdom, courage and experience to emulate these people?
Not in a million years; who would want to emulate the losers in that crowd in the first place? Look where they've led American families throughout the past 50 years.
How about real estate? Here again, it takes skill, patience, education and experience to succeed in the real estate investment business. Most who do succeed are full time real estate investors who have prudently eased their way into the business and out of their former occupations over a period of years.
Many of them understood intuitively that they needed to find ways to finance their own adventure, without depending on borrowed money. That realization allowed them to endure its vagaries and survive its volatility.
Suggesting that everyone can follow this path makes millions for the infomercial producers who hawk books and tapes, but does not produce similar financial results for most buyers of those "educational" products. I'd venture a guess that fewer than one in 10,000 who buy a real estate investment course from an infomercial actually succeed.
Investment in the stock market, in real estate or anything else you might imagine is not necessarily an incorrect decision. It is a myth, however, that individuals who are not following those markets on a full time basis can, in the short or the long run, beat or even stay with the market.
In fact, while the market averages showed a decent compound annual return from 1980 through 2005, individual investor performance during that same time period was a miserable 3.2 percent. The vast majority of mutual funds did not manage to perform as well as the averages either.
If you are lucky, your portfolio today is above 50 percent of what it was a few years ago. Investments are risky. All investments are risky. That is the very nature of the beast. Bernard Baruch, one of the mythical pros of Wall Street, said that to be successful in the market, you need the wisdom of Solomon, the patience of Job and the courage of a lion. Investing is not the place for the uninitiated to put the money that is the foundation of their personal economy. The markets are pure unrelenting risk. They are casinos, and the casinos always win, while most who spend their money there lose.
1I realize that the paradigm that most Americans rely on includes a perception that business and government programs are on some level inviolable. Reality is otherwise. So is experience, and it is important that our preparations assume failure of these systems to some extent. That does not imply that all benefits of these programs are lost, but only that we must build our own fortunes as if they could be. If they aren't, then we are much better off. If they fail completely, we are still OK.
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