Home Radio Segments Guest Segments How Well-Diversified Portfolios Beat Inflation Over Time

How Well-Diversified Portfolios Beat Inflation Over Time

Terry Savage, Beat Inflation

With Terry Savage, Nationally Recognized Expert on Personal Finance, the Markets and the Economy, Author – The Savage Truth on Money (Amazon.com Best 10 money books), Author – The New Love Deal:  Everything You Must Know Before Marrying, Moving In, or Moving

Terry Savage and Steve Pomeranz are both featured speakers at the MoneyShow in Orlando, Florida, in March 2016, a convention that offers individual investors a one-stop resource for unbiased investment education with keynote sessions, panel discussions, free educational seminars, state of the art investing tools, live trading software, networking opportunities, and more. While Steve will talk about investing like Warren Buffett, Terry will talk about focusing on things beyond investing. She says that while most people do focus on their investing, they need to also focus on doing something with the money they’re accumulating, such as their IRA withdrawal plan, their estate plan, long-term care insurance, etc.

Terry’s website features a recent interview with Warren Buffett. She addresses recent market volatility in the first month of 2016, and advises investors to focus on basic facts and to keep things in long-term perspective. The one fact she likes to share is that there has never been a 20-year period (going back to 1926) when investments in large diversified U.S. stocks—with dividends reinvested—have ever lost money, even after accounting for inflation. So stay invested over the long run and believe in the American economy!

Although everyone has heard this many times, it’s difficult to act on this simple advice, because investors are often driven by fear and greed, which often does them in. Here’s where Terry recommends having a good fee-only investment advisor. So know your stage in life,  plan for what’s next, and diversify your portfolio accordingly—all necessary tools to beat inflation.

She warns against taking extraordinary risks just to earn a slightly better return and respects the value of having a certain amount of your portfolio in cash, so you have enough to see you through retirement.

Finally, Terry’s surprised by the Millennial Mistake, the notion that millennials prefer employer provided paid time off and life insurance instead of 401(k) benefits. She understands that the 2008 crash was brutal for many of them but wants them to use time, the greatest asset they have, to grow their wealth in a compounded fashion.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: Please welcome Terry Savage. You all know her as a nationally known expert on personal finance in the markets and the economy. She is the author of The Savage Truth on Money, which, in the new edition, has been named one of the best 10 money books of the year by amazon.com. She blogs on Huffington Post, and she can be found on terrysavage.com, and she’s also nationally syndicated by the Chicago Tribune. Terry, you’re a busy lady, aren’t you?

Terry Savage: Well, the markets are always moving, so so am I, Steve.

Steve Pomeranz: The other thing too, you talk about moving. I understand that you and I are going to be seeing each other at the Money Show, in Orlando, March 2nd to the 5th. What are you going to be talking about there?

Terry Savage: Absolutely. Well, you know the Money Show is just one of my favorite events of the year. I’ve been going to it, and speaking at it, and moderating programs for Kim Githler for so many years, I won’t even tell you, but I noticed, over the years, that there’s a lot of time spent on investing. That’s what the Money Show’s typically about. Not only traditional investments in sectors of the market and so many wonderful experts there, but other products that you can buy, and I’m just going to make the assumption people going to the Money Show are, in some way, successful, they made money in the markets; and now, the question is, what about all the other things that you should be thinking about? Everything from your withdrawal plan from your IRA, possibly needing long-term care insurance in some form, some of these new policies that combined with life insurance
What about your estate plan? These are all issues that people who are so busy making money, forget they need to deal with, when it comes to doing something with it.

Steve Pomeranz: That’s a great point. Those are the issues we deal a lot in our practice here as well, and as I told you, I’m going to be there as well, and I’ll be speaking on How to Invest Like Warren Buffett, and that’s Saturday March 5th at 1:30. Terry, as I said, will be there on March 5th at 8am. To 8:45.

Terry Savage: That’s probably the seminar and what … Okay, now what?

Steve Pomeranz: Okay.

Terry Savage: I wanted to do the interview around, you’re not expecting this …

Steve Pomeranz: No, I’m not.

Terry Savage: … But now everybody heard this and I want just one little teaser on how you’re going to tell people to invest like Warren Buffett. Just one tease for your segment.

Steve Pomeranz: Well, that’s very nice of you. I think it’s fairly simple, especially from me, who’s been following him all these years and reading all the books. It’s not only taking the long-term view, but it’s understanding what constitutes a really good company and how to calculate the numbers, how to look out for very good management to steward your assets forward, and really not to think of the stock market as the primary mechanism for pricing your companies that you own. They’re just quotes; you have to know what your company is worth and then make your investment decisions based on that.

Terry Savage: Such sensible advice. Of course, it comes from you and Warren Buffett. If you go to my website, terrysavage.com, right on the homepage there’s an interview I did with Warren Buffett when the market was most in crisis, a few years back and he talks about those very same characteristics of being unafraid and being disciplined and buying when everybody, of course, is selling; and that’s been his great success, understanding value, which is, we could all do.

Steve Pomeranz: Getting to that, let’s talk about our topic these days: The market, the stock market is just plain scary these days. I mean, two or three weeks of 2016 and it had an historic volatile downdraft that made everybody crazy, and so the kinds of questions I put to you, Terry, is, what should people do when they see market gyrations like this?

Terry Savage: I’ve been in the market for a long time, Steve. Don’t forget I was a founding member of the Chicago Board Options Exchange; so I was down there in 1973 watching the Dow go from over 1000 to a low of 570.01 in a day, I remember that well; so basically cut in half. Over all of these years, I think there’s some basics I posted them in a column, in the homepage of terrysavage.com. The first thing is you need perspective, and by that I mean not just your most recent perspective, which is on everybody’s mind, they’re, “Oh, my gosh. Look what happened in 2008-2009, the market got cut in half,” and then, “Oh, my goodness. We had double digit gains in 2012, 2013 and 2014.” That gets you so conflicted. “Is it going to be the beginning of another bear market? If I get out now, will I miss double digits?” …

Steve Pomeranz: Yeah.

Terry Savage: … So what you also need, beside a real long-term perspective, is some basic facts; and every talk I give, I give this one fact, so stick with me and think about this. This is according to Morningstar’s Ibbotson, the market historians. Now listen to this, it’s true, there has never been a 20-year period, going back to 1926, when you would have lost money in a diversified portfolio of large company American stocks with dividends reinvested.
Even adjusted for inflation, so you can go to 1926 to ’46, 1929 to ’49, 1952 to ’72. Pick every one of those 20-year periods, and even adjusted for inflation, you would have come out ahead. By the way, in all those long years, there have been some scary times. I mean, there was the Depression, there was World War 2, there was Kennedy’s death, there was the Vietnam War, there was the inflation of the eighties, so there were many times when you would have thought, “Uh-oh, it’s all over for America,” but the fact is, the facts are that you never lost money over a 20-year period. Now look at yourself.

Steve Pomeranz: Well, Warren Buffett does say that it’s never been a good bet to bet against the American economy …

Terry Savage: Exactly.

Steve Pomeranz: … And that’s what he’s been doing since he was 10 years old, he was, he’s been betting on the American economy and you don’t really want to bet against it. People kind of know this, Terry. They know it, they hear it a lot, and yet they have these fears. It’s like post-traumatic stress disorder, that’s what I think it’s like.

Terry Savage: Well, that’s interesting, well, we all know.

Steve Pomeranz: Out of 2008, it was just so frightful and fearful.

Terry Savage: Wait a minute, I remember ’73, it was equally frightful and fearful …

Steve Pomeranz: True.

Terry Savage: … And 2000, we’ve had some very c.o.d hydrocodone no prescription frightful, fearful times …

Steve Pomeranz: True.

Terry Savage: … And that’s why perspective’s important, but you know what? You’re right. It doesn’t matter that I can give you statistics, or you can give them, or even Warren Buffett can say it, because when it comes to our own money, we’re ruled by those two emotions that never confront you in everyday life: fear and greed; and that can make you do irrational things. This is a time when it pays to have someone like yourself, a seasoned investment professional with whom you have made a plan who will give you the courage to help your self-discipline stay strong, to stick with the plan. Now, that doesn’t mean everybody should be all in in the stock market, but you have to know yourself.

Steve Pomeranz: Well, that’s what I was going to ask you next, so let’s move on to that. Now, as I get closer to retirement, and especially as I get to a point in my life where I don’t have a regular income coming in besides, let’s say, maybe a pension, if I’m lucky, or Social Security; would you advise people to invest? Should they have all their money in the market? Should there be only a portion? If so, how would they think about it?

Terry Savage: Well, first of all, you have to think not only about, your own emotions, let’s leave those aside for a moment. You have to think your real stage in life, so whenever I’m speaking to a group of people where we have employees, they’re still working. They’re in their thirties, their forties, their fifties even. I say to them, “Here’s this 20-year historic fact that it’s never been a losing thing for you, so you all have 20 years. Maybe not 20 years until retirement, but surely even if you’re 65 and you’re retired, the actuarial studies say you’ve got another 25 years, so the question is, what portion of your money do you want exposed to the stock market,” and people still working and contributing need to make a serious commitment to continuing that 3 or 4 or 600 dollars a month in the 401k and put it in that diversified stock portfolio.
If you want to fool around around the edges, fine, but at the S&P 500 index fund in your 401k is your core holding of stocks, and you have to not get into this, “Oh my gosh, I can call up and push a button and transfer it out, because, look, it’s going to fall more tomorrow.” You stick with it.

Steve Pomeranz: Right.

Terry Savage: Now, when you get closer to retirement, that’s when you work to diversify. Perhaps into more conservative equity funds, Equity Income Funds, I’m scared of bonds, I think every central bank in the world’s trying to engender inflation by printing money, and one day, they’ll succeed, so I don’t want to have a whole lot of money in bonds, and that brings me to chicken money. Money you can’t afford to lose, cash money, market fund, CDs, you get paid nothing now. In Japan now, they’re getting paid negative rates along with Europe.

Steve Pomeranz: You have to pay them.

Terry Savage: You have to pay them to hold your money.

Steve Pomeranz: To hold it, right.

Terry Savage: I understand it’s a real disincentive, especially as people get toward retirement age, or in retirement, to leave your money in cash, but you have to be careful you’re not searching for higher yields and taking more risk. This is the spectrum, and at any given moment, balance is what you see, not because of what the market’s doing today, or this week, or so far this year, or what it might do in the first 6 months, but because this is your plan and that’s it. You need to set an appropriate balance for your situation, your liquidity needs. As you get to the point where you’re required to take money out, you don’t want to be forced to sell stocks at a bad time, perhaps, through the end of the year …

Steve Pomeranz: That’s right, yes, so you need …

Terry Savage: … So you need some cash.

Steve Pomeranz: Yeah, yeah. I often make the analogy of the farmer who knows that winter is going to be coming, they plant their seeds in the spring, they harvest in the fall, but they know winter is coming, so what do they do? They put their part of their crop aside, they can it, they bottle it, because they know that they’re going to have to draw from that. The bonds, in the case of a bad market or at a wintertime in the marketplace, the bonds, your cash is where you go to get your sustenance, and then when the market does cycle back, which it always does, then you can start taking some more money off the table.
Before we go on, Terry, let me reintroduce you. I’m speaking with Terry Savage, a nationally syndicated author and columnist. She writes for the Chicago Tribune, The Huffington Post, and she is the author of The Savage Truth on Money, and she can be found at terrysavage.com. We’re talking about this whole idea of being well-balanced, especially as you get older. I did an analysis the other day for some clients, where we were looking at projected 7 and a half percent rate of return, but one of the people I was talking to said, “I’m scared to death,” so we actually did the analysis based on that person having all of their money in CDs and the like, and guess what? The plan failed, because those kinds of investments don’t keep up with inflation, right?

Terry Savage: You are doing something very sophisticated. Obviously, you are doing Monte Carlo, nothing to do with gambling, analysis, which models multiple scenarios, historically based, so it’s not just averages. Averages can be very dangerous.

Steve Pomeranz: Right.

Terry Savage: You know about the guy that drowned crossing the river with an average depth of 3 feet?

Steve Pomeranz: Yeah.

Terry Savage: Yeah, it was 6 inches deep, but the banks are 10 feet deep in the middle. This is not guesswork, and this is not averages, and this is not, “I’ll think about it tomorrow.” When you get to the moment where you’re no longer earning money, you hope you’ll have money at the end. We all do, whether it’s for a charitable cause, or for our children or grandchildren, but the goal is not to run out of money before you run out of time, and that requires some sophisticated modeling of how you invest and how much you can withdraw, and that’s what you do for your clients, I know.

Steve Pomeranz: It is. You know, so what about Millennials here? We’ve talked enough about retirees. Millennials, you wrote in one of your blogs that Millennials prefer life insurance over retirement savings as a workplace benefit. That sounds really backwards. What’s going on there?

Terry Savage: Steve, I knew this would make you laugh, it made me laugh. As a columnist, I get press releases all the time, and I got a press release from a life insurance company touting the fact, they’ve done a survey, and that for workplace benefits, Millennials preferred not just life insurance, by the way, paid time off and life insurance, as opposed to 401k benefits. They just don’t appreciate retirement benefits as much. Now, we know that Millennials are a little different than the generations that came before them. We know they’re not buying homes, we know they graduated, some of them, into a jobless economy and many of them are just finally moving out of their parents’ basements, so I understand the fear, and they also saw some terrible things happen in the stock market just when they were supposed to start contributing.
I wish they had, in 2008, 2009, 2010 and ’11, because the shares they bought then with the Dow at 6,700, and up to 10,000 and more would have been very profitable, so I think all of us who know about this 20-year time horizon, all of us who have done this over the years, invested regularly, we’ve made our mistakes too. I’m not immune from saying, “I’m going to buy that, now I’m going to sell that.” That always turns out to be a mistake, but what we really need to do is to educate the millennial generation that they have the most valuable commodity of all: Not money, time.

Steve Pomeranz: Time.

Terry Savage: Time leverages money.

Steve Pomeranz: More time than any past generation, I think.

Terry Savage: Exactly, and when you’re young, you think that time is free, you don’t consider time.

Steve Pomeranz: Yeah.

Terry Savage: As you get older, and we talk about retirement and making money less, time becomes a significant factor …

Steve Pomeranz: Yeah.

Terry Savage: … But if you start young, a small amount of money, consistently invested, leveraged over time, is really the best way that this generation will have to have some kind of future retirement security, so it distressed me greatly, and I just wrote a column up at terrysavage.com, and the Huffington Post under my name, called “Millennial Mistake,” and yet here’s a life insurance company going, “Oh, isn’t this a great story? Why don’t you write about it?” I said, “Write about it? I’m going to … I’m just going to put this down immediately.”

Steve Pomeranz: Exactly. My guest, Terry Savage, we are unfortunately out of time. We all know Terry Savage and her book, The Savage Truth, and Terry is going to be at the Money Show along with me. She’s going to be there. The Money Show is from March 2nd to March 5th. Go to The World Money Show, or rather, I’ll say it again, worldmoneyshow.com for more information. Terry, as always, it’s always great to talk to you. Thank you so much for your time.

Terry Savage: I will see you there. You will find me sitting in the very back row in your program.

Steve Pomeranz: You got it. Will do.



Terry Savage is a nationally known expert on personal finance, the markets, and the economy. Terry is a regular blogger at the Huffington Post. She is a frequent guest on television and radio shows, including CNN, CBS, and appeared many times on Oprah! Terry’s most recent book is a new edition of The Savage Truth on Money, which was named one of the ten best money books of the year by Amazon.com in its first edition. Her other current best-selling book — The Savage Number: How Much Money Do You Really Need to Retire? — was published in Fall, 2009 and deals with issues in retirement planning and investing.