Investing in stocks to secure a retirement - anyone else think this is a fraud? (1 Viewer)

[adonis]

I'm growing increasingly skeptical that pouring money into retirement funds is a safe retirement strategy.  

I'm growing increasingly concerned that the only folks who benefit from this are those in it for the short term - the financial managers who take percentages of each transaction, the businesses that manage funds and get fees, the folks who are day traders who make money on the moves in the market in the short term.

I question whether a long term invest and hold strategy is going to work for many of us with decades left until we retire.

Why?  Mainly because, I believe, the fundamental assumptions of the American society are changing.

For decades, as a country we've been pushing at every angle to extract more from our society.  We've invested in ourselves, grown business, increased consumption, and in the second half of the last century, created an easier way to further increase consumption by lending to folks and allowing tons of things to go on credit.  We've expanded into other countries, relying on the cheap outsourcing of labor to continue to drive large shareholder returns.

Basically at every point, we've continued to look for ways to increase shareholder returns by leveraging people's savings, other countries workforces, deregulation, lower taxes, etc.  It seems to me we're getting to the end of being able to take advantage of further opportunities to drive shareholder return, and we're facing other headwinds.

One major headwind is automation.  Companies are able to do more with less, meaning less folks are being paid to achieve more output.  This can help drive a company's bottom line, but for society as a whole, it's unsustainable to continue to automate away jobs while making a smaller and smaller group of folks more and more wealthy.  We're starting to see a lot of ideas be floated now, and taken seriously, than ever before.

Thinks like UBI, thinks like taxes for robots, large company CEO's talk about how "shareholder value is no longer everything".  

Does it not seem to anyone else that the fundamental assumptions of 8-12% returns year over year for decades are unraveling?  We have candidates like Warren and Bernie, gaining huge amounts of ground, who will seek to impose a different way of conducting business in America - less focused on profits, and more focused on improving society.  Politics aside, would this not cause a huge impact on the future profitability of companies, as compared to different political structures up until this point?

The bottom line is that nearly every single person is told that if they invest a certain % of their salary in stocks, maintain a balanced portfolio, and just wait, they'll have a comfortable retirement.  The signs I'm seeing for the future of american capitalism causes concern for me in that the fundamental assumptions that have made past returns come in at a certain rate, won't hold for the future and will likely result in significantly lower returns for folks.

Anyone else out there concerned that we're being sold a bill of goods, that only financial folks are benefitting from in the short term?

 

[identikit]

No.

 

[Sheriff Bart]

Sort of. 

 

[dkp993]

I hope not or I’m F’d.  

 

[Juxtatarot]

There is a huge difference in saying we may not average 8 to 12% returns and saying it’s a “fraud”.

 

[adonis]

To be clear, I've been fully following this guidance for my working life.

However, I'm starting to question whether it's as "fool proof" a way to retire comfortably as I've thought, or whether it's really a game that benefits others and when it comes time for me to retire, the rules of the game will have changed.

I'm not suggesting it's so much a "fraud" as it is a hope that's founded on unrealistic expectations of how the future gains will work, based on changes to society, technology, and politics.

 

[adonis]

There is a huge difference in saying we may not average 8 to 12% returns and saying it’s a “fraud”.

I do wonder though if there aren't a ton of really wealthy folks in the financial circles who see the average man investing their paychecks in stocks, giving a % every time to the financial industry workers, who know it's a risk unlikely to pay returns necessary to achieve the promises folks are being made.

 

[adonis]

Part of this skepticism comes from a recent event.

My parents were seeking a financial planner in their area who just did financial planning - helping them decide what to do with assets as they retire, allocations, and other financial considerations and could not find a single person in their area who did this on an hourly basis.

Almost all of them made money by selling financial instruments where they'd make a % of the sale, and likely some ongoing income like insurance agents do.

There's almost no part of this "retirement" industry that doesn't seek a way to strip away gains from folks on the front end, with promises that folks will make it up over time on the back end with returns equaling (not guaranteed) historical averages.

This just seems to be a game being played, and rules being set, by folks who benefit handsomely on the front-end, with promises of returns and payoffs decades away.

Then, take into consideration some fundamental changes going on in society, and ask yourself whether this is a long term "solution" or whether it's not just a game everyone in the "know" is playing because they're getting paid today, and promising other folks a return tomorrow.

 

[Juxtatarot]

I do wonder though if there aren't a ton of really wealthy folks in the financial circles who see the average man investing their paychecks in stocks, giving a % every time to the financial industry workers, who know it's a risk unlikely to pay returns necessary to achieve the promises folks are being made.

Maybe you didn’t mean this literally but nobody is being “promised” returns in equities.  The bigger problem is people not saving/investing enough. That will be the cause of a crisis.  Although strong returns would help, it won’t matter much either way for many.

 

[KCitons]

I don't think it's a farce. I think it's skewed to benefit those that have avenues to inside information in order to maximize their returns. Compound interest is the greatest thing we have working for us. I also think people see it as impossible because they don't live within their means and aren't saving enough to see the reality of their financial goals. Many of our parents and grandparents didn't consume the way we consume today. Determine what it is that you truly need to live on. Establish short term savings goals. Sock the rest away in retirement. Establish a simple portfolio of diversified ETFs and take what you get. The assumption is, your money will double every 8-10 years. If it doesn't and things stagnate for 50 years, then your retirement is the least of your worries. Our country will no longer be that important and you'll be scrounging to find your next meal.

Happy Labor Day!.

 

[moleculo]

I don't disagree, but what else would you suggest investing in?  

 

[Pickle Rody]

Yes.

eta: I don't have a dime invested in retirement funds. Never will. I like to work and I like to spend my money.

 

[adonis]

I don't disagree, but what else would you suggest investing in?  

Been considering buying real-estate at a low cost out of my IRA/401k and using that to generate income, rather than depending on returns from stocks.

Not saying it's without risks, but there are options.  I'd be interested to hear other options.

But yeah, you can buy real estate from within your retirement account, and have the returns fund your account.  It's risky, but at the very least it might be a good way to supplement what may be lower long-term returns.

 

[adonis]

Maybe you didn’t mean this literally but nobody is being “promised” returns in equities.  The bigger problem is people not saving/investing enough. That will be the cause of a crisis.  Although strong returns would help, it won’t matter much either way for many.

I imagine some folks are being told that's what they'll get.  Maybe the word "promise" isn't there, but the expectation is that this is what they'll get if they invest in given funds.

In most of those situations, there are people on the front end and on a yearly basis that get their cuts on the investments up front, and the "promise" is that the investments will compound and over the decades they'll be set for retirement.

Again, it's a system right now, speaking specifically about our financial system, that takes money from the workers, and gives it to those in the financial sector.  This is true for banking, credit cards, and investments.  The average person largely can't do much without being nickel and dimed from folks when buying stocks, selling stocks, getting advice for reitrement (largely done by folks with conflicts of interests due to compensation coming from selling stocks to people), selling homes, buying homes... We're a society where the average person is "fee-'d" to death.

In my experience, it's those who are on the fee-taking side who generally perpetuate standard "rules of thumb" because it benefits them for people to believe it.  The more folks who buy-into the idea of a meaningful retirement in 30 years if all you do is invest monthly, a certain percentage of your funds, and oh by the way I'll be taking a % of everything you put in today but don't you worry because over time, that investment will compound and you'll be sitting pretty come retirement in a few decades.

I just am EXTREMELY skeptical of a system set up like this.  It's as if we're all marks to a financial industry that feeds off of us a few percentage points at a time, and we're OK with it because we're told that over the long run, we'll be fine.  But there are some legitimate reasons to question whether that assumption is true going forward.  And if it's not true, should we not be considering alternatives NOW to how we invest for the future?

How do folks with money prepare for the future?  Are the millionaires putting a % of their income in certain kinds of funds, and sitting on those, expecting to retire based on compounding and a historic average we use as an estimate?  All the folks who make bank on our small percentages, the rich folks in the financial industry - how are they investing their money?

 

[Juxtatarot]

Again, it's a system right now, speaking specifically about our financial system, that takes money from the workers, and gives it to those in the financial sector.  This is true for banking, credit cards, and investments.  The average person largely can't do much without being nickel and dimed from folks when buying stocks, selling stocks, getting advice for reitrement (largely done by folks with conflicts of interests due to compensation coming from selling stocks to people), selling homes, buying homes... We're a society where the average person is "fee-'d" to death.

I’ll push back on this some.

It’s pretty easy to avoid fees from banking.  Credit cards? You can use them to give you money back.  Even investments can be done at relatively low costs though vehicles like index funds through Vanguard.

Advice?  There is a ton of it free on the internet, much of which is higher quality than you’d get paying your average financial advisor. But it takes a little effort.

 

[KCitons]

I guess it's the same as someone saying "if you study hard, go to college and get a degree, you'll get a great job that pays well". 

It requires more than that. 

 

[adonis]

I’ll push back on this some.

It’s pretty easy to avoid fees from banking.  Credit cards? You can use them to give you money back.  Even investments can be done at relatively low costs though vehicles like index funds through Vanguard.

Advice?  There is a ton of it free on the internet, much of which is higher quality than you’d get paying your average financial advisor. But it takes a little effort.

I'm putting this out there to get a lot of pushback, so push away!

I do all of my advice-gathering from online.  I really like bogle-heads forum, and I invest almost totally in low-cost index funds, with low expense ratios.  Anyone I talk to I advise the same.  Diversify, balance portfolio, age-based risk, low fee index funds, invest for the long-term.

So there are certainly ways to avoid how the system is set up.  But let's be honest - folks who can do their own research are a much smaller % than those who get caught up in the system, the way it's intended.  Even folks like my parents who want to find fee-only investment advisors have a hard time doing so, and likely will have to drive 3+ hours to find someone, because the system isn't set up in a way that's beneficial to consumers.  It's set up to feast on us.  It's set up to eat away as much as possible from our activities, again, with the promise of benefits down the road.

It has been dawning on me that our entire system is set up in this predatory way, regarding finances, and most of it is set up with the promise/expectation of future returns.  

But do we have reasons to doubt future returns will repeat historical averages, especially 20 years from now?  If automation truly does do away with a large number of jobs, will the returns from companies be the same as they've always been , or will we start seeing more expectations from companies that automate away jobs to pay taxes or other fees to those who lose jobs, like Yang's approach?  UBI?  What about a politics that seems to be saying we should value people's lives over shareholder returns?  More regulations to better distribute income rather than allowing the capital to accumulate at the top, rewarding folks for driving profits higher and higher for themselves and stakeholders.

 

[adonis]

I guess it's the same as someone saying "if you study hard, go to college and get a degree, you'll get a great job that pays well". 

It requires more than that. 

Certainly seems, with the cost of college, that even this truism should be re-examined.

Or at the very least, how to do college.  Seems like it makes more sense to do community college for pre-reqs while working, and then do a state or other lower cost school and get a job immediately, than to do college the "traditional" way, going into nearly 100k in debt at least, which again benefits the financial industry and the colleges, but not the average person.

Society has gotten so out of whack in terms of benefitting folks, versus seeing us as marks.  College tuition is another good example.  Buying houses. Retirement.  Loans of any kind. Credit cards.  Gun control, lobbyists.  It just seems like in so many areas of our lives, we are merely fodder for the system, cows to be milked before being put out to pasture, and most of the milkers are actually returning almost no value to the system.  Certainly not value in proportion to the amount of milk being extracted.

 

[Gopher State]

I don't think it's a farce. I think it's skewed to benefit those that have avenues to inside information in order to maximize their returns. Compound interest is the greatest thing we have working for us. I also think people see it as impossible because they don't live within their means and aren't saving enough to see the reality of their financial goals. Many of our parents and grandparents didn't consume the way we consume today. Determine what it is that you truly need to live on. Establish short term savings goals. Sock the rest away in retirement. Establish a simple portfolio of diversified ETFs and take what you get. The assumption is, your money will double every 8-10 years. If it doesn't and things stagnate for 50 years, then your retirement is the least of your worries. Our country will no longer be that important and you'll be scrounging to find your next meal.

Happy Labor Day!.

Agreed stocks double every 8 years add a low cost source, Vanguard and your good.  I owned real estate , cds, stocks, bonds, over my career, and I have made double on stocks vs any other investment.  Helps if you can hit on a few stocks, I got the majority of my Apple @99.00, Facebook @102.00, now working on canopy, next big thing!

 

[IvanKaramazov]

I’ll push back on this some.

It’s pretty easy to avoid fees from banking.  Credit cards? You can use them to give you money back.  Even investments can be done at relatively low costs though vehicles like index funds through Vanguard.

Advice?  There is a ton of it free on the internet, much of which is higher quality than you’d get paying your average financial advisor. But it takes a little effort.

Strongly agree with this.  I wouldn't go so far as to call financial planners and actively-managed funds "frauds," but they're definitely rip-offs.  Index funds make long-term investing trivially easy.  

 

[adonis]

Strongly agree with this.  I wouldn't go so far as to call financial planners and actively-managed funds "frauds," but they're definitely rip-offs.  Index funds make long-term investing trivially easy.  

It's easy, and less expensive compared to the alternative higher fee options, but is the premise of low fee, and compound growth, in order to retire, a premise that is based on fundamental assumptions that are unlikely to hold true in 20-30 years?

 

[IvanKaramazov]

It's easy, and less expensive compared to the alternative higher fee options, but is the premise of low fee, and compound growth, in order to retire, a premise that is based on fundamental assumptions that are unlikely to hold true in 20-30 years?

I don't see why.  Compound interest is a mathematical reality that isn't going anywhere.  And I don't see any reason to think that firms are going to suddenly become long-run unprofitable.

 

[Dickies]

I don't disagree, but what else would you suggest investing in?  

Wheat pennies

 

[Juxtatarot]

Society has gotten so out of whack in terms of benefitting folks, versus seeing us as marks

Another point, for what it’s worth, is this isn’t anything new or something that use to be in whack. In fact, I think things were worse.  A story that immediately came to mind is contract home “buying” to African-Americans in Chicago in the 50s and 60s.   But, of course, the haves have been taking advantage of the haves-nots for centuries.

 

[msommer]

It's easy, and less expensive compared to the alternative higher fee options, but is the premise of low fee, and compound growth, in order to retire, a premise that is based on fundamental assumptions that are unlikely to hold true in 20-30 years?

I don't see why.  Compound interest is a mathematical reality that isn't going anywhere.  And I don't see any reason to think that firms are going to suddenly become long-run unprofitable.

Well, if we hyperbole the heck out of it and automate 90%+ of all jobs then few will have a paycheck and thus be able to afford the goods and services being produced. That is a fundamental change over existing conditions that needs to be looked at. Not sure I have any answers in such a respect, iut could be interesting to collectively think aout such a scenario from the standpoint of society, individual and corporation

 

[adonis]

Another point, for what it’s worth, is this isn’t anything new or something that use to be in whack. In fact, I think things were worse.  A story that immediately came to mind is contract home “buying” to African-Americans in Chicago in the 50s and 60s.   But, of course, the haves have been taking advantage of the haves-nots for centuries.

Interesting.

I think the way the haves now take advantage of the have-nots is, rather than targeting a minority group and doing dastardly things, they target every single american and chip away at us a few percentage points at a time.

I can't immediately think of another industry that's so percentage-based as the finance industry.  As if the value of their services scale in direct proportion to the funds involved.  We as a society seem to have accepted that a realtor's fees being 6% of a home value somehow makes sense, as if they have to work harder for a $100,000 home than a $300,000 home.  Same thing with investments.  It's similar to all these retailers, especially restaurants without servers, including a line item for Tips on the receipt.  

Individually, investors have little power to push back against the fees, and many folks don't pay enough attention to the fees, or to how seldom their fund managers beat an indexed version of the market.  So the system sucks from them.  

Anyway, this isn't a thread to complain so much about that, but instead to say that this very system has a vested interest (pun intended) in ensuring that folks believe that 20-30+ years out, their money will compound, the stocks will continue to rise, shareholder profits will continue to drive this system, because to challenge that conventional wisdom is to challenge their entire revenue stream.  And when you have an entire system unwilling to question the core premise of buy and hold investing for retirement, you don't get a lot of critical analysis.

So what I'm doing here, in a heavy-handed way, is asking the question about whether the premise could be wrong.  What if the premise that we save X% of our money, invest in low-fee index funds, diversified, dollar-cost-average, don't time the market, adjust allocations as you age to go from risky to less risky - what if all of this is just built on a future that won't come to pass, due to issues we could foresee if we were looking out for them?

The biggest impacts I see are:
- A change in the perception that returning shareholder value is the primary driver of a company
- A continuing increase in automation that will fundamentally reshape the job market, and likely require changes to tax structures for large companies reliant on automation (such that it will affect returns to shareholders).
- A growing societal appetite for redistribution of wealth, of regulation of businesses, of addressing income inequality, all of which could come with some serious ramifications to a company's ability to push profitability.  
- Climate Change - while it may create some opportunities for businesses, I think the resulting carbon taxes and other ways to reign in our excessive consumption from an environmental point of view will be expensive for companies.  
- We're leveraged almost to our eyeballs as a country, and continuing to find new consumers to put things on credit to fund economic growth will run out of steam.  And when it does, you have stagnation, recession, or depression.  And what do the prospects long term look like after this is done?

I certainly hope, personally, that this is all concern about nothing.  But I find very few folks talking about it, and for something I'm staking my future on, I want to examine all possibilities.

Maybe there are some ways to invest today that can hedge against the kind of stock market stagnation I fear.

 

[msommer]

- A change in the perception that returning shareholder value is the primary driver of a company

IMHO, from this change it becomes possible to build a more sustainable society not only in terms of the environment.
There are several potential models out there (Shared Value, Triple Bottom Line etc) but from what I see they are (currently) light on detail that is actionable.
Perhaps trying out such models is easier in societies moored in a democratic socialism/capitalism hybrid than purely capitalist ones

 

[adonis]

IMHO, from this change it becomes possible to build a more sustainable society not only in terms of the environment.
There are several potential models out there (Shared Value, Triple Bottom Line etc) but from what I see they are (currently) light on detail that is actionable.
Perhaps trying out such models is easier in societies moored in a democratic socialism/capitalism hybrid than purely capitalist ones

Agreed, but it'd be a significant shift in terms of what rates of returns folks should expect from a stock market over a long period of time.

In a society which attempts to maximize shareholder value, we may get the returns we've seen over the past several decades.  

But if we shift to a system that reduces the importance of maximizing shareholder profit/value, we should expect to see reduce rates of return on investments over short and long terms.

 

[msommer]

Agreed, but it'd be a significant shift in terms of what rates of returns folks should expect from a stock market over a long period of time.

In a society which attempts to maximize shareholder value, we may get the returns we've seen over the past several decades.  

But if we shift to a system that reduces the importance of maximizing shareholder profit/value, we should expect to see reduce rates of return on investments over short and long terms.

IMHO the shift is most significant in the change from short termism (this quarterly result will trigger bonuses) to something where the gratification of your needs can be a long term prospect (living healthy through retirement, learn for life, clean and livable environment for all). To enact such a change we'll have to be able to assign values in a non (individually) materialistic way. On example of what we need to shift away from is 

we should expect to see reduce rates of return on investments over short and long terms.

I'd argue that we should see an increase in ROI, but perhaps not measured in dollars, but in some other term(s) that do(es)n't eliminate or discard non monetary values to the individual and society.

An example of this type of thinking is public health where the best saving is the dollar that isn't spent because the indices of a particular disease is trending down. To be more clear, we can think of obesity. If we can entice the population at large to move more and be more cognizant about the effects of what they fuel their bodies with, we may reduce the ratio of severe obesity, the kind that really costs money to treat. Not only does it have a positive effect on our current measure (dollars spent on health care) but there are other values that should trend up in improved quality of life, more efficient use of resources etc.

ETA: I don't disagree that the monetary ROI will reduce if we start changing our measuring sticks

 

[adonis]

ETA: I don't disagree that the monetary ROI will reduce if we start changing our measuring sticks

I think this is my concern - that over the next few decades, due to considerable changes within our country, the measuring sticks of our economy will shift in such a way that what many of us have been banking on (8-12% yearly returns over the long term) are a thing of the past, and that this "return" is invested elsewhere in society.

The examples I listed above are just a few of the major things that could change the fundamental assumptions that our investments bank on.

 

[msommer]

I think this is my concern - that over the next few decades, due to considerable changes within our country, the measuring sticks of our economy will shift in such a way that what many of us have been banking on (8-12% yearly returns over the long term) are a thing of the past, and that this "return" is invested elsewhere in society.

The examples I listed above are just a few of the major things that could change the fundamental assumptions that our investments bank on.

The we become the greatest generation as we suck up the pain of changing our forebearer's faulty measuring sticks for the betterment of all

 

[adonis]

The we become the greatest generation as we suck up the pain of changing our forebearer's faulty measuring sticks for the betterment of all

I'm not opposed to changing the measuring stick.

What I'd like to do is change the measuring stick, while ALSO ensuring I can retire comfortably.

 

[msommer]

I'm not opposed to changing the measuring stick.

What I'd like to do is change the measuring stick, while ALSO ensuring I can retire comfortably.

I hope that's not "having your cake and eating it, too"

 

[Mario Kart]

Part of this skepticism comes from a recent event.

My parents were seeking a financial planner in their area who just did financial planning - helping them decide what to do with assets as they retire, allocations, and other financial considerations and could not find a single person in their area who did this on an hourly basis.

Almost all of them made money by selling financial instruments where they'd make a % of the sale, and likely some ongoing income like insurance agents do.

There's almost no part of this "retirement" industry that doesn't seek a way to strip away gains from folks on the front end, with promises that folks will make it up over time on the back end with returns equaling (not guaranteed) historical averages.

This just seems to be a game being played, and rules being set, by folks who benefit handsomely on the front-end, with promises of returns and payoffs decades away.

Then, take into consideration some fundamental changes going on in society, and ask yourself whether this is a long term "solution" or whether it's not just a game everyone in the "know" is playing because they're getting paid today, and promising other folks a return tomorrow.

I don't disagree, but what else would you suggest investing in?  

A person can conclude that the stock market is just a huge pyramid scheme and they'd be correct. The top asks the lower to invest their money for a, hopefully, 10% gain. If the bottom didn't invest, what is the top going to do? Sure, they will reshuffle their deck periodically and move their money around but they will need new investors at some point to drive profits rather than dry profits.

What the top has done mightily well, though, similar to moleculo's statement, is they monopolized investing. What other game are you, me, others going to play?

 

[NREC34]

Wheat pennies

Precious metals and high end sports cards 

 

[Juxtatarot]

A person can conclude that the stock market is just a huge pyramid scheme and they'd be correct. The top asks the lower to invest their money for a, hopefully, 10% gain. If the bottom didn't invest, what is the top going to do? Sure, they will reshuffle their deck periodically and move their money around but they will need new investors at some point to drive profits rather than dry profits.

Not a single sentence of this makes sense.

 

[Mario Kart]

Not a single sentence of this makes sense.

Sure it does. The stock market is a giant, legal, pyramid scheme. You either play the game or get left behind. Prices go up yet wages do not, relatively speaking. I “spend” my money to invest it because there is no other way to maintain my lifestyle as I age. If the stock market didn’t exist, many people would be much better off. Because the stock market exists, it helps spread the wealth gap exponentially. 

 

[Juxtatarot]

Sure it does. The stock market is a giant, legal, pyramid scheme. You either play the game or get left behind. Prices go up yet wages do not, relatively speaking. I “spend” my money to invest it because there is no other way to maintain my lifestyle as I age. If the stock market didn’t exist, many people would be much better off. Because the stock market exists, it helps spread the wealth gap exponentially. 

I don’t think you understand what a pyramid scheme is.