MaxSpeak, You Listen!: INVEST THIS

Quotable is Barkley Rosser, Professor of Economics at James Madison University, January 20, 2005, in the Harrisonburg Daily-News Record (print version only):

“Second involves the private accounts proposal, with the stock market forecast to rise annually at 7.8% per year forever. However, if economic growth decelerates [as projected by the Social Security Trustees–mbs] we should expect stock market growth to slow down much more. We had a mild recession in 2001 and the economy is now growing above its historical rate. However, all stock market indices remain below their March, 2000 peaks, the NASDAQ below half that peak, even though President Bush pushed through tax cuts favoring stock market investment. We hear that the stock market has always increased over periods at least 20 years long. But many people die less than 20 years after they retire, possibly facing negative returns. The Dow-Jones hit 1000 in July, 1966, not reached again until the end of 1982. The Nikkei in Japan remains below half its level of more than 15 years ago. The impending retirement of baby boomers may worsen this as their stock market investment for retirement ran up stocks in the 1990s. As they retire, they will start selling stocks, putting downward pressure on the market (price-earnings ratios remain above historical averages).”

[MaxSpeak] A basic assumption in the debate about Social Security is that everyone should be invested in equities, or private sector assets in general. We beg to differ. Most people — meaning those whose ability to accumulate wealth is limited — need title to low-risk assets. This means pension plans with defined benefits, wherein the risk lies with the party better able to shoulder it — the employer. Such employers need to be properly regulated to ensure responsible fiduciary behavior. The trends have been in the other direction. For people who want to save for bequests, there are already tax-favored vehicles available.

Most people won’t beat the market. Neither can most highly-paid fund managers. You pay them extra for a sub-market rate of return. Pick individual stocks? Forget it. You’re playing against people with much better information, and the time to make the best use of it. “Control over your own money” is jive.