Playing with the Box

I was on a cross country flight recently and I re-read a book called “Simple Wealth, Inevitable Wealth” by Nick Murray, a former rock star speaker who was beloved by the financial advice industry – mostly because he constantly told his advisor audiences that they are great, do important work and are worth every penny they make.  The book was written 20 years ago and, unlike the other books by Murray, was written expressly for investors.  Reading it again provided both a nostalgic stroll down memory lane and an enlightening insight into how much the financial services industry has changed in the past generation.  Some parts of the book have held up well.  Others… not so much.

I’ll begin with the positive.  The good news is that I still find it refreshing to read Murray’s perspective on the perverse way the media defines risk.  He simply, compellingly and eloquently walks readers through the very real risk of outliving your capital as a result of a reliance on the quaint notion that bonds are “safe”.  Safety, according to Murray, is having a pool of capital that you cannot outlive – and putting a significant portion of your life’s savings can significantly impede that outcome becoming a reality.  I was also heartened by his acknowledgement that there are false dichotomies and that the real decision in the ongoing ‘debate’ between active and passive approaches is really a choice between the more relevant considerations of product cost.  Murray also writes persuasively about the need for specific, measurable, time-bound goals that help to focus the mind and guide in principled decision-making.  Best of all, Murray names and blames what I believe to be the biggest culprit in most peoples’ failure to meet their financial goals: themselves.  More specifically, their own behaviour.

There are also a few things that cause me to shake my head in disbelief, however.  The most obvious of these are the return assumptions that he puts forward as being reasonable.  Granted, the numbers he uses are based on historical data, but he does relatively little to explain that real returns are fairly constant and that a portion of all nominal returns is inflation.  While he doesn’t expressly tell people what inflation rate to expect, he does note that there is historically about a 5% premium for stocks over bonds.  He uses 11% as a proxy for expected stock returns and 6% for bond returns.  To put that in perspective, I currently assume inflation to be 2% with a 5% real return for equities (7% nominal) and a 0% real return (2% nominal) for income.  How times have changed, now that everyone has re-calibrated their expectations toward a low-growth, low-inflation environment for the foreseeable future.

Then there’s the related question of a sustainable retirement withdrawal rate.  Murray uses 6%.  Many years ago, I remember people talking about the real rate being 5%.  For the past number of years, I’ve been using 4%.  Note that my current withdrawal rates are actually more aggressive/ less forgiving than Murray’s.  You’re much more likely to not run out of money withdrawing 6% from something that’s earning 11% than to withdraw 4% from something earning 7%.  Financial planning is easy when your assumptions are based on a rose-coloured past rather than a murky future.

The thing that struck me the most, however, was his admonition to readers (remember, Murray is writing to ordinary investors here) to focus on first principles.  Everyone knows the old ‘life’s like that’ story about getting a young child an expensive present for Christmas or a birthday only to have that child spend more time playing with the box that the gift came in than with the gift itself.  Parents the world over just shake their heads in dismay whenever this happens.  They must hope that the misappropriation of interest will be corrected at some point and that their little darlings will eventually come to appreciate the value of the far more important contents of the package.

Nick Murray was biting in his criticism of the way some people have come to think.  As a lifelong zealot for equity investing, he was emphatic that the “present” in this metaphor is common stocks and that the mutual fund structure frequently used to buy them is nothing more and nothing less than the box it comes in.  What matters, according to Murray (and I strongly agree) is that people have sufficient and diversified exposure to stocks, not the structural details of the box that the stocks come in.

In the 10 or 15 years since Nick Murray stopped giving ubiquitous keynote addresses to people like me, I’ve realized that a large portion of my peers – perhaps even the majority of them – have become enamored with the box to the point that they are more likely to disparage other boxes than anything else.  Stated differently, I lament that many of my peers spend way too much time fretting (and sometimes even arguing) about which box to put the present into.  This is especially ironic because there are now gift bags on the market that allow you wrap the gift in something equally attractive for a fraction of the cost.

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