Mutual fund managers' horse race.....what Garrett Van Wagoner
represents......the baby boomers' predicament.....
Goodman is on the staff of Money magazine. He often is asked to
appear a personal finance expert on radio and tv. He also conducts investment
seminars for companies and employees on 401k plans and investing.
How has Money magazine changed?
Well, Money magazine has kind of ridden the whole bull
market and, I think, contributed to it as well. We've gotten a lot of people
in. It's really helped them realize their financial dreams in many cases. Our
circulation -- when I started in the late '70s we were at about five or six
Now we're selling about two million copies a year. We're up four times. We've
attracted some competitors, we were almost alone back in the late '70s as a
source of financial information. Now there are radio and TV shows, newspapers
have columns on these topics, there are other magazines. There's been a
profusion of information for people because there's so much more interest in
So Money has kind of ridden this whole thing, but in certain ways spawned more
doing the -- the same thing. A feature we have called "One Family's Finances"
where we profile individual families, has become kind of a lot of people try to
copy what we do all the time. Wall Street used to be just kind of its own
little private club and what Money Magazine has done, and others, has
brought Wall Street to Main Street and allowed the average person, the average
middle class American, to get into mutual funds and stocks and low interest
credit cards and get better deals on mortgages and make themselves financially
aware of all these things, which before, they didn't really think they had any
Are you selling pie in the sky?
Not everybody can achieve these things, but they do have dreams, and if
they do things right, you really can improve your financial lot a lot. Now
we've put on the cover, you know, how you can make a million dollars. Well, in
fact, if you start at age 25 in a 401K, you have a company matching you and you
do it for 40 years and you invest it well, you can in fact create a
million-dollar portfolio. If you start later, you probably won't make it, but
if you, in fact, do the things we talk about, it's not unrealistic to do that.
And many, many people are now accumulating hundreds of thousands of dollars in
their 401Ks because of the investing they've done. So we do have to get
magazines that people are interested in buying and we do a very good job of
that. We're selling two million a month.
And I don't think it's pie in the sky. I think that these are things that
people can actually achieve if they understand the rules of the game. And
they're trying to learn the rules of the game in many cases. A lot of people
have come late to the party and it is a party. I mean there's a feeling like
"Everybody's makin' all this money on Wall Street. How do I get in on the
action?" And that's -- and we tell them how to do that at Money
Magazine. We tell them what mutual funds are good and what aren't good and
what to watch out for as well as what to buy. We have a lot of cautionary
advice as well as positive advice on what to do.
And a lot of contradictory advice.
There's a lot of advice in Money Magazine, in all the
magazines. Part of people's problem is there's so much advice, they don't know
who to trust. Now we've been around by far the longest and so there's a
certain trust level that they have with us. And, in fact, our recommendations
do quite well, including our negative recommendations. We also tell people,
"Don't get into the hottest fund of the moment." The funds we tend to
recommend are those that have longer term track record like five- and ten-year
performance instead of the loudest, latest hot fund of this month. That's a
dangerous way to buy mutual funds and we tell them that all the time. So
there's a lot of things people can do. I mean we've gone through many phases.
In the '70s and early '80s we talked a lot about tax shelters. Those don't
exist anymore. So we don't talk about tax shelters. These things do go in
phases at a certain point.
What did you make of the [radio] calls you got this morning?
Well, it was interesting......clearly a lot of people are in the
market very, very strongly in a lot of risky stuff. We saw they were in
technology funds, some aggressive stocks, individual stocks, Intel. And when
the market's falling like this, it worries them. Their expectations have been
to make a lot of money and they've been making a lot of money for a long period
of time. And when the market's nervous like this, particularly with the
leading part of the market, which has been the technology stocks, it clearly
makes people pretty nervous. We also had some people there didn't know what
they were doing. They were in mutual funds, but they didn't seem to understand
it too well. And doesn't matter too much when everything is goin' up, but when
the market starts falling, you start learning about this. And that's in
general what's been the market.
Just to give you a sense of what's been goin' on in the last few years here,
85 percent of the money now in mutual funds has come in since 1990. There's
not been a 10 percent correction in the market since Saddam Hussein invaded
Kuwait. So most of the money out there has never really gone through anything
like a correction of any significant measure at all. So it, makes people
nervous whether small investors are going to panic and flee when the market
goes down seriously or not.
Now my general view is they're not going to flee as long as the alternatives
are not that attractive. If you can get two-three-four percent on your CDs or
money market funds, that's not that attractive an alternative compared to the
potential return in stocks. Now, obviously, there's more risk in stocks, but
as long as you can't get nine-ten-11 percent, as you could in the '80s on the
CD or money market fund, then people are gonna be willing to sit it out. And
that's been the experience. So far, during the '90s every time the market's
gone down, people have seen it as a buying opportunity. So far, they've been
right. The market has come back every time. So they were right not to panic
when the market went do, for whatever reason. And I think a lot of people have
that view that they're gonna sit it through. Back in the '80s, particularly
the '87 Crash, they did panic. A lot of people did sell out the low. They
felt pretty foolish about themselves later. So in that case they said, "Well,
I'm not going to be foolish again. Let me ride through this thing. I've
basically got good investments and long-term, I'll make money," which is the
right attitude to have.
That's the attitude we've always had at the magazine. Market timers are always
gonna get whip-sawed one way or the other. They're gonna buy when it's up,
when they're enthusiastic, and they're gonna sell when they get depressed when
it goes down. Not a good way to make money. I think people are willing to
ride through these things for the long term. Now if we get a bear market, it's
probably not going to be the kind of bear market we had before, which was very
quick, sudden, and it's over. It's probably going to be a longer term bear
market like in '73 -- 1973 and '74, it lasted a long time and stocks were down
50 and 60 percent. That is much more difficult for people to deal with in a
certain way than a sharp crash kind of situation and it's over with before they
even have a chance to do anything about it.
So we'll have to see if people hang in there through a long-term bear market,
which is a little bit harder to deal with, but I think in the long run they
will do that, as long, again, as a alternatives are not very attractive.
Why don't they just invest in conservative mutual funds? Why so
I think people went into aggressive funds because they realize they have
to catch for the investing they've not been doing. It's what I call the
Catch-Up Generation. All these particularly late Baby Boomers, people in their
late 40s and 50s, they've been spending their whole life. They have not been
saving. And now they see their retirement not that far off, 10-15 years, maybe
earlier. And so they say, "You know, I'm not going to make it in a
conservative mutual fund to have the kind of capital I need to live for a long
time decently. Social Security is not gonna be there for me."
And I see this in seminars all the time. People don't believe there's going to
be any Social Security. There will be something called Social Security, but
it's not something you're gonna want to live on. So if there's not going the
have Social Security for them and they're gonna have their own 401Ks, which is
very important, but that's not enough. The only way to make up for the lost
time that these Baby Boomers have not been investing is to invest aggressively.
And they see these terrific returns that people have earned and they assume
they're gonna get the same returns. They may or may not, but they say, "Hey,
I'll get 40-50 percent. That's okay." That's a dangerous way to look at it
because just because it's happened the last few years doesn't mean it's always
I was doing a radio show in Kansas City recently and this woman had gotten into
20th Century Ultra, which is probably about the most aggressive mutual fund you
can get. And it was up about 50 percent last year, something like that. So
she said, "Even if I don't get 50 percent, it's okay if I get 25 percent.
That's okay." I said, "Well, how about if it went down 25 percent." "No, no.
Not down. I'm not greedy. I don't have to get 50 percent." Well, in these
people's minds the idea of it going down 25 or 50 percent is nonexistent. So
that's what worries me a little bit is that they can get too kind of carried
away with the enthusiasm and not realize you can actually lose money, not that
you'll make less. That's a very big difference in the way you think about
investing in mutual funds.
They have high expectations?
People do have high expectations and you can see it in the kind of cash
flows into mutual funds. The money is going where it's been hottest --
technology funds. They see these records, 50-60 percent in the last year or
so, and they want to jump in. Many people do not get the return that they've
seen because they're getting in after those returns have been earned in many
cases. So you got to be careful to jump in on something that's already shot
Just to give you a few examples, some mutual funds that have been very hot will
open for a short period of time and get a ton of money because of the record
that was in the past, not what's gonna happen in the future, necessarily.
There's a fund even recently called the PBGH, Growth Fund, which has probably
has one of the best records -- I think in the last year it was up about 90
percent. They just opened an emerging growth, an even more aggressive fund for
one day and brought in a hundred-million dollars in one day and closed that
fund. A lot of people couldn't even -- would have wanted to get into it, they
couldn't even get into it. They didn't even know it was happening. That's the
kind of money that's chasing the hot action right now. Now probably you'll do
well long term in a fund like that, but if there's a bear market or the market
gets hit, for whatever reason, short term, I'm worried that people could want
to bail out of it. They shouldn't, but they might be people with these high
expectations that get dashed and they freak out the moment something goes
What does Van Wagoner represent?
Somebody like Garrett van Wagoner represents the hopes and dreams
of Americans. Here's a guy who's had a fantastic record investing in very
aggressive stocks, but a lot of technology stocks, and he shot from nowhere and
became number one. This is what can happen in the mutual fund industry, is if
you create a good track record, people will find you. And with Garrett van
Wagoner, he had a great record, he's continued to have a good record by being
aggressive, and he's attracted all this money. That's what happens. Again,
it's a little bit worrying that all the people who are in after he's up 40-50
percent may not get that kind of return long term. But they're attracted to
his record and they're willing to pour money into him if he's got a good track
What about the idea the funds are growing at a pace they themselves
can't keep up with?
It is very difficult to manage a lot of money, particularly if it comes
in very quickly. And so you see in many cases, including Garrett van Wagoner,
is they close their funds. If they can't deal with a amount of money they have
coming into protect their existing shareholders, they will close the funds.
Not too many businesses out there I know that will refuse money on which they
will earn big profits, but that's what happens in the mutual fund industry.
So if the fund is taking your money, that's telling you the fund manager thinks
he can invest it wisely and produce the return that's going to be similar. If
they close the fund, that means that he thinks he can't invest it wisely and
they're almost protecting you against your own greed. They don't want to take
your money and have you be disappointed. But you see funds closing all the
time because they've got such a surge of cash, particularly the ones with small
It's hard to invest billions of dollars in very small companies where there
aren't that many shares outstanding. And you put a ton of money in very
quickly and it, in itself, makes the stock go up. So particularly the small
company funds tend to close faster because they don't want to buy out the
entire company; they want to have a relatively small piece of that, be
diversified among many different companies. If you have $2 billion, it's hard
to diversify among a lot of high quality companies and not move the stock
prices in the process.
That's putting a lot of faith in these managers that their greed
isn't going to want to just keep taking money in.
It's true there's this feeling that these fund manager making a lot of
money 'cause they are from management fees. But on the other hand, they do
want to have shareholders for the long term. Now we've been through a cycle
before back in 1983. We had a similar surge in technology stocks. Everybody
was getting in and the people who got in at the top lost a lot of money,
discouraged a lot of people from mutual funds for a long time, for particularly
the technology funds.
The fund managers today don't want to have that experience again. They don't
want to have people get in at the top, have the thing fall and they sell and
have tremendously disappointed investors. So they're much more quick today to
close mutual funds than they were in the past, where they wouldn't have done
Describe the horse race phenomenon.
There's a tremendous pressure on the mutual funds managers to get the
top performance on a quarterly basis, certainly on an annual basis, because if
they don't, they'll lose their shareholder.... What's particularly hard today
is to keep up with the indexes. Many, many mutual funds managers, like 80
percent of mutual funds do not beat the Standard & Poor's 500 Index, an
unmanaged straight portfolio of 500 stocks. That's even more true with the
small companies, the more aggressive ones. So these fund managers who are
getting in these billions of dollars are under tremendous pressure to beat
these indexes. Well, if you don't beat the index consistently, it can make it
kind of hard on you.
So as a result of that, in general they've been investing these huge amounts of
cash in stocks quickly. Cash levels are at relatively low levels, six or seven
percent, because if they don't invest it, they don't want to be sitting on the
sidelines with a lot of cash at a time when the market's zooming and they're
gonna miss their indexes. So that's the kind of pressure you see on these fund
managers all the time, yet if they do very well, they can become very wealthy
very young. And you've seen that all the time.
Garrett van Wagoner is a good example. Here's somebody who has a great track
record, very smart guy. He's done very well for himself and his shareholders
coming out of nowhere basically in the last two or three years. Everybody else
wants to be a Garrett van Wagoner, too, and get along while things are going
well. And I think things are going to go well long term because it's a
self-fulfilling thing in a certain way. All the money that's coming in is
creating the market going up in general, meaning more people want to get in,
and so on. Now there's a certain point at which valuations just are ridiculous
and it gets totally out of hand and that ultimately does come back to Earth.
But right now the money that's coming in is propelling the market higher.
Just to give you some examples, so far in 1996, we've had more money come in to
stock mutual funds than in any previous year in history. Well over $130
billion has come into stock mutual funds when the previous record was about
$129 billion for all of 1993. And this is money that has high expectations
with it that these fund managers want to put to work. So this is what's
driving the market now.
Is it dangerous?
What's dangerous about it is expectations. If people come in with high
expectations and are disappointed and say the market goes down, correct 10 or
20 percent, what they've never seen before and they sell, they can lose a lot
of money. That's what's dangerous about it. If they stay with good quality
for the long term, it's not dangerous because that is the way people are going
to finance their retirements. The Baby Boom is going to be around for a long
time and they're going to need a lot of capital to live off of it to have a
decent lifestyle. They're not going to be bailed out by the government and
Social Security. Their company pension plans in many cases are being
terminated and being converted into the old defined benefit plan where the
company invested it, did everything for you, into these new defined
contribution plans, the 401Ks, and the 403Bs, where you have a chance to invest
yourself, but if you don't, the company's not going to take care of you. So
people realize that and are more and more taking the aggressive growth oriented
options in their 401Ks ...That's the way they're gonna make it.
So what is the predicament the Baby Boomers are finding themselves
It's what we call the Sandwich Generation. They have three big needs for
capital, themselves. They're gonna live a long time in retirement. In many
case their parents are trying to move back with them. This is a big trend now,
is parents moving back with their kids. And then their own kids and the
tremendous cost of raising the kids in the first place, and then the college
education, as well as all their other needs, homes and vacations and cars and
everything else. So Baby Boomers have a big need for capital if they feel
squeezed by their current situation. The real solution is aggressive
investing, because that's the way you can get higher returns for the amount of
money you can save.
So the big thing today is 401Ks and in general so called "defined contribution"
plans where the company is giving you a chance to contribute in many cases
matching your contribution, allowing you to invest aggressively. More and more
companies are offering aggressive investment options and investors are taking
then up on it. Just to give you an example, I was at a seminar recently at
Toyota. Toyota used to have just two investment options, growth and basically
fixed income. As of a month ago, they now have nine investment options,
including aggressive investment, international investment, those kind of things
where they have more options.
The first day they offered these options they had $20 million go into them.
They did in one day what the human resources guy thought would take six months
to do, because the Baby Boomers, the working population there, said, "The only
way I'm gonna make it is by being aggressive." Now they're taking more risk,
but in the long term they're right. Just having it in the fixed income option,
where they're earning five or six percent, they're not going to have their
money accumulate very fast. So if they've got a long-term perspective in these
defined contribution plans, they will be doing the right thing. And that, in
itself, is helping the market because this money is coming in not episodically,
but every two weeks. Every paycheck people are having two-three-four-five
hundred dollars pulled out of their paycheck automatically going into
aggressive investment options.
Now the fund managers who are receiving that money know it's comin'. Every two
weeks they get another few million dollars from these 401Ks. So it gives them
the confidence to invest aggressively, because they know it's not hot money
that's going to be here today and gone tomorrow. So that, I think, is part of
what's feeding the whole aggressive investment options out there, that the
people investing the money know they're gonna keep gettin' more.
What about the old safety net?
Well, the two big institutions that provided the safety net are
basically trying to get out of that business. The first one's the government.
Now Social Security's gonna be there, but it's not gonna to be something that
people are going to be depending on as much as before. The people now
receiving Social Security are getting out far more than they put into it, and
they're also getting cost of living increases and Medicare and all kinds of
nice benefits. And that's fine as long as the Baby Boom, who's now in its peak
earning years, is pouring in something like $60 billion a year more than is
being taken out in benefits. But the Baby Boom realizes that when the Baby
Boom retires in 2015-2020, their kids -- there aren't going to be enough of
them paying in as much so that the benefits are going to be less. So Social
Security's going to be there, but not something people want to count on. The
other big part of the safety net was the pension plans, so called "define
benefit" plans, where the company invested for you, they put the money in there
in the first place and you'd get a lifetime pension when you retired. Well,
those still exist and there's about three or four trillion dollars in these
pension funds, but they're not being added to the way they were before and many
companies are either terminating their old pension plans or at least offering
defined contribution instead of defined benefit, which is a major structural
change. So that the defined benefit is not being offered in many medium- and
small-sized companies today, as it has been in the past. So the two big
institutions, the government and corporations that provided the safety net are
providing less of a safety net and people realize it and, therefore, that's why
they have to invest on their own. And they are doing it in massive numbers.
Define "defined benefit" and "defined contribution" again.
Well, pension plans have changed before, they were so called
"defined benefit" plans, meaning the company invested the money. They did all
the contribution. All you had to do was work there and when you retired, you'd
get a certain level of pension. You had basically no responsibility for it.
"Defined contribution" is really the much more prevalent today where you are
given the chance to contribute. In many cases, companies will match your
contribution as well, but if you don't take 'em up on it, the company has no
responsibility for you. So you not only have the responsibility to sign up for
it in the first place, but then where you invest your money. And more and more
companies are offering different investment options. A lot of people are
confused about where they should be investing -- aggressive, conservative, or
something in between -- international.
So that's a big difference between the two, is the level of responsibility has
been shifted from the employer to the employee in a way a lot of employees are
not particularly prepared to deal with. And they have a lot of questions on
how to deal with it. And that's why, for example, we at Money Magazine
have started a newsletter aimed the 401K participants. And it's gone from
nothing basically to over a million subscribers in the last two years. And
it's helping people to figure out how to invest in these 401Ks. There's a
whole bunch of consultants that have popped up to help people invest their 401K
money because they don't feel -- see, the companies don't feel they're in a
position to give real advice on this, as to where people should be investing,
because they don't -- if something goes wrong, they don't want to be blamed.
"You said I should be investing in that aggressive fund." So they can kind of
objectively give them information, say, "Here's how these funds have performed
historically, but you, employee, have to decide." That's very different from
the old traditional pension plans where the companies made all that decisions
on where it was being -- to be invested.
Isn't this overwhelming for most people?
People are definitely confused and want information, and there's
a lot of people out there willing to provide them information, for good or ill,
that'll help them or hurt them with these 401Ks. In many cases companies are
offering too many options. I did a seminar at General Motors. They now have
41 options of where you can investing your money. I think that's too many.
They have seven different kinds of growth funds, four different kinds of
international funds, three different kinds of bond funds, and it definitely
leads to paralysis and confusion on the part of many employees who are not
trained on how to allocate their money among these different assets. So, on
one hand, it's a scary thing, on the other hand, it's a tremendous opportunity
for people to learn and take responsibility for themselves, which we've not
had. We've had a kind of paternalistic society. Now less so in America than
in Europe and other places that have a more socialistic view where the
government's gonna take care of everything for you. But even so, the waning of
the traditional defining benefit pension plan and the lessening importance of
Social Security is putting responsibility in people's hands which they
particularly -- some want it, but a lot of 'em are not particularly prepared
This is not being taught in schools. The young people coming up are not
learning about 401Ks and financial management and budgeting and car leases and
mortgages and all -- this whole area of personal finance is not still being
taught in schools. And so people say to me, "Well, how am I supposed to learn
about all these things?" And they learn it by doing it in many cases. And in
many cases they don't do much. And this is why I see a lot of Baby Boomers now
who get into their late 40s who haven't really paid much attention to their
personal finances and they see retirement coming and they get scared and start
to do things quickly. This is what I call the Catch-Up Generation.
Is it too late?
It's not too late, because if you start investing in your mid to late
40s, invest wisely, invest aggressively, get some good quality mutual funds or
stocks, you can do very well for yourself. The earlier you start, the better
it is, the more compounding you have for you. What's really dangerous is for
people, say, in their 60s to start investing for the first time in aggressive
things, because they don't have the time to recover if something goes wrong in
the meantime. We had one of those people on the radio show. Somebody called
in and said they've only got five years to go before retirement and they're
just starting to invest aggressively now. This makes me a little nervous
because if they've based their experience on what's just happened in the last
five or six years, they might be disappointed. Long-term return on stocks
going back to 1926 is about nine percent per year. Now in the '90s we've had
returns of 12-13-14 percent, on average, some years a lot better than that. So
people do not think it can go down or you can have much lower returns. So
that's what's a little bit nervous-making for me, is that people getting in
kind of at the end of the game. But when they do hang in there for the long
term, stocks are clearly the place you're going to get the highest long-term
rate of return.
Talk about downsizing in relation to the market.
People are very contradictory position these days. On one
hand, they see these big companies downsizing, AT&T laying off 30,000
works, whatever it may be. And they don't like losin' their jobs. On the
other hand, the moment they announce these things, the stock prices go up
dramatically and they're both employees and shareholders. So they have a split
feeling about this. On one and, as employees, they don't like to get laid off
or even if they remain there, the existing work is piled onto fewer people. So
their work load goes up and their pressures go up. On the other hand, they're
stockholders and they like to see their stock price go up.
I do a seminar with people from AT&T, for example, out in New Jersey. And
here are people who are getting $300- and $400,000 severance payments. They've
been there for 30 years. Well, that's nice, but they don't have their job
anymore, but they do like seeing their AT&T stock going up a lot. So it's
a contradiction in society, that we really haven't learning to deal with yet.
People don't know if they're happy or sad when these big lay-off announcements
and downsizings come. It's been the big corporations that have been doing
this. In general, the medium- and smaller-sized companies are growing. That's
where the growth is in the economy these days. Now everybody likes stock
prices to go up, but if you lose your job as a result of it, that doesn't make
people feel too good.
Tell me some stories.
I remember an engineer from AT&T... he had I think it was about a
$300,000 severance package and he'd been at AT&T for 30 years. And he
said, "What am I supposed to feel? On one hand, I just lost my job and my
security and Ma Bell was going to protect me forever. On the other hand, I've
got this big wad of money. I've never had that much money. I've never had a
check for three or four hundred-thousand dollars before. How do I invest this
thing? Should I keep in my AT&T stock?" So you have to counsel them to
diversify. A lot of people have most of their money in one stock, their
company stock. They've been there reinvesting in their company all the way
along. So they have their careers on the line as well as their investment
portfolio in the same company. So I tell them, "You should diversify and not
have your entire career and your investments in one company."
Well, they must have an ambivalent relationship with the
People do have an ambivalent relationship with their company. They
don't want to get laid off, but they want their stock price to go up. Now, in
general, the winners today in society have been the stockholders, not the
employees. Employees are not getting big wage increases. Instead, they're
getting profit-sharing. They're getting stock bonuses. They're getting things
that are tied to the success of the company, particularly through the stock, as
opposed to wages. So, on one hand, that gives you tremendous up side if you're
in a good company that's doing well. I mean you could imagine the number of
millionaires that are at MicroSoft today. On the other hand, you're not
getting the month-to-month, day-to-day pay increases in salary -- that's the
way most people thought they could make their money before.
So there's a change in the way people are being compensated. A lot of people
are willing to take risks to leave bigger companies and go the smaller
companies to get stock, particularly private companies, because then if those
companies go public, they can become instant millionaires in some cases
billionaires, by having the value of their stock go up. A good example would
be Steve Jobs, who founded Apple and then basically got thrown out of his own
company at Apple, went off and founded Pixar, which does computer animation for
"Toy Story", Disney movie. Well, he became a billionaire when Pixar went
public. He used his own capital and so on. And all the employees, aren't
that many employees at this company, became extremely wealthy as well. So
people are willing to take that risk to get pieces of stock in companies that
can make a lot more money than they could ever have made in their salaries.
The market's booming and corporations are laying off thousands of
people and wages are stagnant ...
Well, Wall Street is really running the country today in many ways. The
analysts and the fund managers who are investing all this money, shareholders,
are demanding higher profits all the time. And this is a pressure that the
corporate executives feel. And they see it time after time, if they don't
perform, they're outta there.
Just look in the last few years. The CEO of IBM, the head of General Motors,
the head of Kodak, the head of Motorola, all kinds of major companies have had
their CEOs thrown out because their companies are under performing, brought in
another CEO who did all kinds of things the previous CEO would not have done --
sold off divisions, laid off employees. Well, they get the message. So a lot
of CEOs want to stick around and they do that before they're forced to do it by
either being laid off themselves or having bad earnings.
So the pressure for all of that downsizing and keeping their profits up is
coming from Wall Street in many cases. Now Wall Street's not this kind of
impersonal place. It's the money that's being invested by all these individual
investors through mutual funds, through 401Ks, through pension plans. So this
is, again, the kind of paradox. The employees who are being downsized in
another are putting the pressure for these higher profits all the time through
the investments they're making.
Where were you in the '87 Crash?
I remember the Crash of '87 very well. I was working at
Money Magazine, and I'm the one in my office who has the stock market
being updated on my computer all the time. So I had lots of people looking and
seeing how it was doing all the time. I remember going out at lunch time to
the local Fidelity office and seeing a huge crowd gathered around watching the
ticker-tape in shock that the market could fall a hundred points, and then 200,
and then 300, -- and there was no breaks on this thing. And it really scared a
lot of people. But the people who really got hurt are the ones who sold after
that. Almost no individual investor sold on the day of the crash. They found
out about it later. There, in fact, were net redemptions in mutual funds for a
year after the crash. It took a while for it to sink it. That was the worst
possible time to be selling your stocks and mutual funds because prices were
But I remember the media was doing things on the people selling apples and they
had pictures of the Depression and "This is the end of" -- it scared a lot of
people. And so they learned a lesson from that. They've taken to heart in the
'90s that you don't sell when it's down. You sell when it's up and when it's
down, you buy more. But at that time it was a very scary time. And the other
thing is people had an alternative. People forget that during those times you
could get 10 percent on a bond or a money market fund. They had a good
alternative to go to. Today they don't. If the stock market goes down and you
go to a three or four percent money market fund. So it's not as attractive
place to go as it was during the crash.
So this is what we got?
If you're going to increase your assets in the long run, the
stock market is the way most people are gonna do it, either directly or through
mutual funds or 401Ks. And in the long run that has been what has worked.
Bonds are fixing you at the part rate of interest. That's a relatively low
rate of interest, certainly below the double digits that we had in the '80s.
And stocks, as volatile as they may be, are the place that people can make
money significantly for themselves in the long run. If you look at the way
people have made money in this country, it's basically been two ways, real
estate and the stock market. Now real estate is not the way people are gonna
make money as much in the future as it has been in the past. The demographics
are not as favorable for real estate. You don't have the Baby Boom moving in,
buying all these places. Many communities are over-built. The tax advantages
of real estate are not what they used to be. So if you have real estate, the
stock market's where most people are going to invest most of their money, and
wisely so, I think, for the long term.
How has the fund industry responded to all these lay-offs and
Well, the mutual fund industry goes for where the money is. And the
severance market is probably one of the biggest markets out there. Here are
people who've been working at these companies for 20-30 years all of a sudden
getting a payment of $200,000, $400,000, $600,000, which they've never really
invested before. So the mutual fund industry sees that as something that they
can really help people out with. And they're going after it. They're doing
seminars. They have advertising campaigns.
One of the big reasons that mutual funds like the 401K business is that when
people leave a company, either voluntarily or involuntarily, they get a big
amount of money that they want to keep within that company. So if your 401K
has been with Fidelity or Dreyfus or Scutter or Kemper, or
whoever it may be, and you've had a good experience in the last ten years,
chances are you'll keep it with Fidelity or Scutter or Kemper. That's
why the 401K market is so attractive to people, because this is the biggest
pile of money people are ever gonna see, bigger than the value of their home in
many cases. And particularly Baby Boomers, who are starting younger today,
when you reach retirement in the mid-2000s, their nest eggs are going to be
worth hundreds of thousands, if not millions, of dollars. And the mutual
funds, this is the logical place for them to be wanting to get a piece of that
pie. Remember, their earning management fees on all this money. They're
charging roughly one percent per year to manage the money. So you get one
percent of $500,000, that's a good piece of the change for the mutual funds.
It's a good market for them to go after.
What about when the Boomers retire and pull their money out of the
People often ask, "When the Baby Boom retires, are they all going to
sell their mutual funds on the same day and the market's gonna crash?" I do
not think that's gonna happen. First reason is the alternatives are not going
to be very attractive. If you have a long-term disinflationary economy, as I
think we do, and the alternatives to the stock market are going to be
two-three-four-five percent money market funds and CDs, these Baby Boomers will
have 20 or 30 years of great experience in the stock market and aren't going to
want to put up with low returns on cash alternatives. And they're going to
realize that you have to have your money growing for the long term. So I don't
think they're going to pull out their money all at once.
It's a concern, but even in the older places, for example, right now Japan and
Germany have very old populations. They have very few people were born after
the war. And so now they have very elderly populations relying on the stock
market in many cases. They have very, very low interest rates. In Japan, it's
like half of one percent. So retirees are not relying on CDs and money market
funds to live; they're retiring on stock market returns. So I think the same
thing will happen here. As long as the alternatives are not attractive, Baby
Boomers in retirement are going to remain invested in stocks and mutual
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