Air
date: September 19, 2003
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KAREN GIBBS: We've heard it so much it's become the gospel, or at least popular media clichés. The bear market fried your nest egg, turned your retirement dreams into nightmares. But is that true? The first comprehensive look at 401(k) plans over the past couple of years shows something very different.
From 2000 through 2002, the S&P tumbled nearly 40 percent, but the average 401(k) plan was off only 10 percent. And in the last year of the bear market, even workers staring retirement in the face didn't fare as badly as the headlines might suggest. The S&P was down a whopping 22 percent, but the 50-something crowd lost less than half of that. Their 401(k) plans had an average loss of about 9 percent. Was this savvy investing or just dumb luck?
Harold Evensky, chairman of Evensky, Brown & Katz and considered the dean of financial planning in America, joins us from Chicago, as does Don Phillips, managing director of Morningstar.
Well, Don, was it savvy investing or dumb luck?
DON PHILLIPS: I think it was discipline. The key difference between these 401(k) plans and the S&P 500 index average that you quoted is that these 401(k) plans were more broadly diversified and investors kept making additional contributions to them. Regularly they put money from their paycheck into their 401(k) plan. That's dollar-cost-averaging, and that means you buy more shares when prices are down, and that will lead to better returns in the long run.
HAROLD EVENSKY: I wish I could agree with Don (that) it was totally discipline.
I think it was a big element of dumb luck. A lot of people simply had far more money in money market and cash accounts because they didn't know what to do and they weren't paying any attention to it. The end result was a silver lining, but I wouldn't count on it next time around.
GIBBS: Well, Harold, is there any surefire way of outperforming the market?
EVENSKY: Not in my opinion. You can get market returns for the risk you're prepared to take, but we're not big believers in outperforming the market. We just like to keep money and have it grow reasonably.
GIBBS: Don, what kinds of funds are ideally suited for 401(k) plans?
PHILLIPS: Well, I really like these types of funds that are called life strategy funds or lifestyle funds or life cycle funds, in that they're broadly diversified. They'll act, in effect, like a fund of funds. It will start with a core that perhaps it's in the S&P 500 index, and then it will have a series of more specialized funds around that. And these are tailored to take some of the decision making out of the process and insure that the investor gets a diversified, well-rounded portfolio.
GIBBS: Does that mean the investor doesn't have to look at it frequently and rebalance?
PHILLIPS: Well, that's one of the nice things. These plans, these types of funds do the rebalancing for you. And in the case with some of them, like the T. Rowe Price retirement funds, they'll actually have a target date in mind and they'll grow more conservative as they get closer to that date, which you try to align with your retirement date.
GIBBS: Harold, do you agree with that?
EVENSKY: Nope. My problem is that it then assumes that all your money's in the 401(k). So by doing something like that to begin with, you may have, from a global standpoint, if you look at all your assets, a totally unbalanced portfolio. The second problem is that, the whole lifestyle to me is a sociologist solution, but you know the profession, 1.7 parents, 2.3 children. I've never met a client like that, so just because it's simple and it's generically appropriate doesn't mean that it's appropriate for an individual.
I would agree that if all else fails and you're not going to pay any attention, you're probably better off doing that than throwing darts or trying to buy the hot fund of the last ten minutes. But I think that people, if they're planning the rest of their life, the quality of the rest of their life, they ought to spend a little more time than just defaulting to a lifestyle fund.
GIBBS: Well, what should they look at then, Harold?
EVENSKY: Well, the first thing they do, before they start buying the new curtains for the house is build a plan. They have to look at where all their money is right now, not just their 401(k), but maybe they've got an IRA on the side or one of the spouses has some other savings or another 401(k). Then decide how much should be in stocks and bonds. Then start allocating within the different choices. You look at the 401(k) because it's more limited. We often suggest just an index. Almost all of them have like an S&P 500 index. You may lose some tax advantages, but at least you don't have to watch it all the day. And then build on the perimeter where you've got a lot more choices, some of the other kinds of investments you're making.
GIBBS: Well, let's take a look at some of the most popular retirement funds. We've got the Fidelity Magellan Fund, the Vanguard 500 Index, and the Fidelity Contrafund, when you look at just stocks. Turning to bonds, of course PIMCO Total Return and Vanguard Total Market Index rank right up there, too. But, Don, there are so many choices. Is there such a thing as too much choice?
PHILLIPS: Well, it can be. In some cases these plans get way out of hand. In many cases you've got a CFO who is overseeing the plan. He or she might be a real investment enthusiast, and they want all of these different options because they would like to perhaps invest in them. And some of these plans end up not only with five or six plans, but in some cases hundreds of different choices. And for the first time investor that can be absolutely overwhelming, and in many cases too many choices is as daunting as too few.
GIBBS: So what should they do, Don?
PHILLIPS: Well, I think the thing you want to do is streamline the process and simplify this. If you've got lots and lots of funds, first ask, "Is there a tier, a first tier of simplified options, say, conservative, moderate and aggressive choices?" And many plans are now putting these together to make it easier for the first time investor. You know the problem with 401(k) plans is that they have to serve all comers. Some people are ready for very sophisticated choices and to do the kind of analysis that Harold's talking about, but a great many people need an easier choice, an easier on-ramp into saving for retirement.
GIBBS: Harold, let me turn to you. Let's say that you have a married couple here that's planning for their retirement and they want to have the same lifestyle that they currently enjoy now. The husband maybe has 10 years left of employment and the wife wants to retire in about five years. What would you recommend?
EVENSKY: First they better get together deciding on their retirement goals. The basic process is trying to figure out, this pot of money, how is it likely to grow between now and retirement and what's it need to earn to meet their goals? And that will lead them to a stock/bond percentage. You know, 40 percent bonds, 60 (percent) stocks. Then look at their choices.
And I agree with Don. We see it all the time. People walk in with these humongous lists of choices in a 401(k) fund. We can't even make heads or tails of it. So we'll start looking for some of the ones you suggested, like the PIMCO. It's pretty hard to go wrong in a bond in PIMCO. You typically can't get that independently, so it's a great choice for a good core bond holding. And in the 401(k), some of the funds, the core Fidelity fund, some of the core American funds are very good core holdings. So we tell people keep it fairly simple. Possibly a lifestyle fund. If not, create your own simply by buying a core stock fund, core bond fund, and then maybe doing a little playing around the perimeters if you enjoy it and you've got the time to spend focus on those other pieces.
GIBBS: I guess you just answered my next question, to index or not to index. It has a place, but you think there's some ways that you can tinker with it and make it a little bit better, Harold?
EVENSKY: Yeah, we're big believers in index. We think you need to build a core, invest in the market, get market returns. And then around the perimeters where you start taking your risk, you concentrate risk and pay a lot of attention to it.
GIBBS: Harold, what are some of the biggest mistakes that investors make in their 401(k) plans?
EVENSKY: Well, the biggest is not putting money in the 401(k) plan. The second, and Don I think has alluded to it, is if there are 10 choices, you know, divvying their money up over the 10 choices or investing in a fund that's got a hot name, what I call the fund of the last 10 minutes, and then forgetting it for the next 20 years. So it really boils down to not putting the money in, and when they're putting it in, not paying attention to where it's going.
GIBBS: Did we do anything right, Harold?
EVENSKY: Yeah. The fact of the matter is that, in general, most people did contribute a reasonably substantial amount, maybe not as much as they could have, but they obviously contributed a lot, and by default they had a fair amount in fixed income, which helped carry them through.
GIBBS: Don, what should investors make of the latest mutual fund scandal, charges that some mutual funds were playing favorites with investors?
PHILLIPS: Well, I think they should be reasonably concerned about this. These are serious charges that get right to the heart of the fiduciary responsibility the fund management companies have to investors. At the same time, I think they should take some comfort in the role that the regulators are taking and how aggressive they're being, and you're already seeing the fund companies respond very seriously to these charges. And I hope this serves as a wake-up call to the fund industry that they absolutely, positively must give investors assurances that they will always put the investors' interest first.
GIBBS: Harold, your take on that?
EVENSKY: I think that investors should be basically apoplectic. But I agree with Don. I think the silver lining is it clearly has the attention of the regulators. They're doing what I believe they should have done for a long time. The fund company, the lobbying arms of the fund company have at least stepped back, stopped being so aggressive, and maybe they'll all catch on and realize that it's the investors' money that everyone should be concerned about.
GIBBS: Harold Evensky and Don Phillips, thank you very much for joining us.
Healthy living and investing
GEOFF COLVIN: Well, it's the trend you can't avoid. Americans are apparently obsessed with health, buying low-carb beers, like this one, baked, cholesterol free, nacho cheesy, tortilla chips, like this, and other apparent impossibilities. Health club memberships are up, sales of organic food are up, sales of vitamins are way up. But at the same time, Americans are fatter than ever and getting more so fast.
What in the world is going on? Whatever it is, it's significant and probably an investing opportunity.
Matthew Patsky co-manages the Winslow Green Growth fund, up 92 percent year-to-date; he's been analyzing the healthy living and natural products sectors for years.
Marshall Cohen is chief industry analyst at NPD Group, where he focuses on clothing and related industries.
Matt, first off, please resolve this contradiction. We are obsessed with health. We are getting fatter by the day. What is going on?
MATTHEW PATSKY: The consumer, certainly the aging baby boomers, are very obsessed with trying to live a healthier lifestyle, but they've also been obviously indulging in higher caloric intake, which has been an ongoing trend for the last 40 years really.
But certainly you're seeing a demonstration of what I would call a divergence in terms of population and that there is a part of the population that certainly wants to live healthier and is, and we're seeing the outcome of that being greater demand for natural foods, organic foods. We're seeing on the opposite end obviously a part of the population that is not living a healthier lifestyle, and that is causing an explosion in things like diabetes, an epidemic now at 17 million diabetics in this country.
COLVIN: Well, spotting a trend is one thing. Figuring out how to make money from it is quite another. Where are the absolute most promising areas?
PATSKY: The most promising areas we've found within healthy living have been in the natural food and organic: Whole Foods Market, which is the leading retailer; United Natural Foods, which is the leading distributor of natural foods. Certainly two very promising holdings.
And on the opposite side, I mean certainly we've been trying to look at ways of playing, keeping people healthy when onset of disease occurs. With the growing obesity problem in America, there's been an epidemic in diabetes. In looking at that marketplace, we've, our largest holding is in PolyMedica, which is the leading provider of supplying people directly to their home of testing kits, has been one of our core holdings and is growing at over 20 percent a year and trading at a very reasonable multiple still, despite the fact the stock's done very well for us.
COLVIN: There's a lot more to this trend than just food and medical devices. For example, clothing is increasingly being designed to accommodate bigger people, people who are bigger all the time, women's and men's clothing. We talked recently about this with a manager at a J.C. Penney store.
(video excerpt begins)
MANAGER: This stretch band. The age is getting lower and lower, because people are getting heavier, and so they want that same comfort fit. But they don't want to see it bulging around the back. They want it kind of concealed so that they can't really see that it's an expand.
(video excerpt ends)
COLVIN: So who is grabbing this opportunity, and who ought to be grabbing it but is not?
MARSHALL COHEN: A lot of the larger retailers are beginning to recognize that there's opportunity to market to these niche markets, the large size consumer, the consumer who's actually part of the aging population. And we're even seeing stores like J.C. Penney and Wal-Mart that have created plus size departments, even for the junior consumer, the one that spends more money than the population.
COLVIN: There are other industries completely that are looking at this phenomenon and it gets overlooked, but what's going on?
COHEN: What we're finding is if you really look around, you're going to see lots of different industries that are addressing this area very quietly. Things like the auto industry are beginning to recognize that they need to speak to consumers about what inconveniences there are for the large size consumer. For example, just the size of an automobile seat, the ability to get in and out of a car, rotating seats to allow the driver to get in and out easily. Even movie theaters are designing seats bigger than they have been in the past. Electronics with the key pads. A lot of people who are larger size don't have the ability to push those key buttons just so easily.
COLVIN: We mentioned Whole Foods Market. It's America's largest natural foods retailer. It is the fastest growing company in the entire grocery industry. For a company that disdains hormones, its financial results look like they're on steroids. The stock has more then doubled over the past three years. John Mackey is the founder and CEO of Whole Foods Market. He joins us from Houston.
Why couldn't Wal-Mart, Albertson's, Safeway and Kroger add natural and organic foods and take this business away from you?
JOHN MACKEY: Well, they are adding them. They've been doing that for a number of years. But we are the authentic brand. We've been doing it for 20-plus years. We have a commitment to it. And it's not just a question of Wal-Mart and Safeway picking up a few of our products. That's not going to take our core customer base away from us. Once a person makes a lifestyle change to eat healthier, they want to continue to shop at a company like Whole Foods which is completely committed to it.
COLVIN: Well, that raises a very interesting question, not just for you, but for the whole sector, which is what do your customers really want? Do they want to live healthier? Do they want to sort of feel like they live healthier? What is really driving them?
MACKEY: I always find it difficult to generalize about the customer, because we have millions of customers and they all have slightly different motivations and desire. So it's difficult to generalize about it.
We appeal to the segment of the population who's really concerned about their health and well-being, who probably tends to exercise more, who's very conscious of not eating to much and eating the right things. But that doesn't appeal to everyone in our society. There's certainly, probably the much larger percentage of people are less interested in eating well, and consequently they are, they're the ones gaining most of the weight.
COLVIN: One thing that worries investors is that you have, worries them even though it's wonderful in its own way, you have very high profit margins, much higher than the typical grocery store. Typically of course this attracts competitors who will compete those margins back down to the average. Is there any danger of that happening?
MACKEY: I suppose there's always a danger. I mean no business is immune from competition, and everyone's trying to take your business away from you. So Whole Foods Market doesn't own this market. I think we're much further ahead than other organizations are. I think we understand the market better. I think we're learning quicker, we're innovating.
But it's not going to be handed to us. We don't -- you sort of rent the customer. You don't own it. So we'll only maintain our position in this market and our good profit margins by taking care of the customers better than our competitors are able to do.
COLVIN: You have a somewhat unusual approach to managing. Last year you took I don't know how many months off to walk the Appalachian Trail. This year you were hiking I think in Colorado. How did it go?
MACKEY: It went very well. I didn't take so much time off. I did take a month off this summer and did hike the Colorado Trail. I really enjoy long distance hiking. And they can't find me on the trail, so I do get time away, that the stress of my job, I can escape from it for a little period of time. It's good.
COLVIN: Thanks, John.
COLVIN: Marshall, what are a couple of companies that have benefited particularly from these trends we're talking about?
COHEN: The first two that come to mind are Haggar, which is a company that's benefited greatly by this convertible pant, and the other is a company called Hot Topic, which is producing product through their retail stores called Torrid, which are growing at great rates selling plus size to kids.
COLVIN: Plus size to kids?
COHEN: That's correct.
COLVIN: Matt, what are a couple of companies that have benefited particularly from this trend?
PATSKY: A name that you wouldn't expect to benefit is Chiquita, which has been in a turnaround...
COLVIN: The banana people.
PATSKY: And certainly has been a potassium-rich, healthy snack that's very convenient, and certainly we've been doing very well in that stock in addition.
COLVIN: You mentioned PolyMedica. Who else do you like?
PATSKY: Some of the other names we like are Sonic Solutions, which is a technology play. They've got the DVD market. Within the healthy living and the sort of treatment of disease we have holdings in companies like Conceptus, which is in, basically it's a replacement for tubal ligation, which is obviously another issue that's facing the environment population. You know, names like Flamel are recent additions to the portfolio.
COLVIN: What do they do?
PATSKY: Which is a drug delivery company.
COLVIN: Matt, in this area one stock that comes to people's minds a lot is Weight Watchers, because it has performed so terrifically. Is it now too high priced?
PATSKY: Well, for us we think it's too high priced, and so we're not in it, and it looks to me to be too rich a valuation.
COLVIN: Marshall, I'm curious about what else you see happening as the industries you cover respond to the enlarging of the consumer.
COHEN: One of the interesting things to look at is just how the meal business and the restaurant business has approached this. At first they were about freshness, and then the following year they went into value meals, and then they went into super sizing, and now they're talking about healthy.
So what we're seeing is the industry is trying to change and stay in touch with this consumer growth when it comes to health and aging, and it really is a major issue for them to try to begin to market directly to the consumer.
COLVIN: Well, it is a major issue, and you are an expert on brands, among other things. Now will the consumer permit, say the McDonald's brand to stand for health and fitness?
COHEN: If they do it right, the answer is clearly yes. Because you have to remember that the same number of people that are eating in these restaurants are also looking to be able to eat healthier. That's something that people are very conscious of.
One of the things that are research does show is that the consumer relates very heavily the loss of weight as part of the health movement. So if they can find places where they can lose weight, a la Subway is a great example, people tended to react to Subway's success based upon the fact that it was about losing weight that was part of its campaign.
COLVIN: We mentioned earlier the two big trends, Americans being obsessed with health, Americans getting heavier. If you had to bet which one of those is going to end first, what would you say, Marshall?
COHEN: I think that this is a trend that is more about a lifestyle, and we're going to see people continue to grow in size. And I think the weight gain is going to continue to remain a bigger issue.
COLVIN: What do you say, Matt?
PATSKY: I hope he's wrong, and I certainly think that people are going to, I mean it's kind of where does it end? If it continues the way it's going right now, we're going to be in pretty desperate shape in terms of healthcare costs.
COLVIN: Matt, Marshall, thanks so much for your views.
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