1. Who's Responsible for Your Retirement? You Are.
For generations, the rules of the workplace were simple: You said a hearty "Good morning" to the department secretary, you put in a solid eight hours at the office, and you retired at a reasonable age with a comfortable pension. But today, those rules have given way to a new order -- one with voice mail and Outlook calendars in place of secretaries and a workday that seemingly never ends, thanks to the smartphone-driven era of nonstop connectivity.
But the biggest change of all may be the demise of the pension plan. With the help of new federal laws and provisions passed in the 1970s, private-sector companies have been gradually shedding the costs and risks associated with funding their employees' retirements -- a helpful boost to their bottom lines, particularly at a time when Americans are living longer (average life expectancy has risen from 47.3 years in 1900 to 78.3 today). In the absence of those paycheck security blankets, more and more Americans are being asked to "own their retirement" -- that is, to fund and manage accounts that will be used to cover their expenses in their postwork lives. And most are doing that through such complicated -- and often flawed -- do-it-yourself retirement vehicles as the 401(k) and the IRA.
For financial-service firms, of course, this migration has been a big positive, thanks to the flow of trillions of dollars into those 401(k)s, IRAs and other retirement accounts -- $9.4 trillion to date, more than six times as much as in 1990. All that money generates sizable commissions and fees for brokerage houses, mutual fund managers, financial advisers and the like.
But what about for Joe and Jane Investor, who often have to decide where to invest that dough and whom to trust with the decision? For them, most experts say, it's a mixed bag. True, Americans have gained a degree of financial literacy they didn't have previously. "Years ago," says Chip Wieczorek, vice president at Beacon Trust in Morristown, N.J., "people didn't need to know the difference between stocks and bonds." But a little knowledge can be a dangerous thing. Many observers point to the way that panicked investors pulled out of the markets during the height of the 2008 09 meltdown, only to miss the rally that followed. Regardless, the trend toward owning your own retirement won't subside in the years ahead, the experts say unequivocally. By the year 2016, according to research firm Cerulli Associates, the amount invested in 401(k)s, IRAs and similar retirement accounts is expected to grow to $12 trillion -- bigger than every economy in the world except America's.
2. With Funds, Small Is Beautiful
The migration of consumers' retirement savings into 401(k)s and IRAs created a huge opportunity for the mutual fund industry, which mushroomed right alongside those accounts. Mutual funds hold 55 percent of the money in such retirement plans today, up from 11 percent two decades ago. And when a newbie retirement-plan investor picks a fund, there's a good chance he'll put his money into one of just a few well-known giants. Bolstered by marketing and by the fund companies' relationships with the firms who administer retirement plans, the big players have been getting bigger. The 100 largest funds now hold $3.5 trillion, up 62 percent since 2008.
Many of these funds are popular for a reason -- one way or another, they've put up a track record that looks good in hindsight. There's just one problem: Time and time again, as mutual funds get bigger, their performance erodes. On average, the top 100 funds have landed in the bottom half of their Morningstar fund categories over the last three full calendar years. What goes wrong? Jeff Tjornehoj, a mutual fund strategist at Lipper, says some simply "outgrow their habitat." As investor assets pour in, managers need a place to put them. Some buy stocks that are on their "okay" list instead of their "great" list; others build up big stakes in individual companies, leaving them overexposed if something goes wrong. This can be especially problematic when millions of dollars are pouring in each week because a particular sector or investing style is "hot," says Geoffrey Bobroff, a mutual fund industry consultant in East Greenwich, R.I. The upshot: Too often, a fund's performance levels off, with managers unable to deploy money in ways that don't hurt investors.
Not every megafund runs aground, of course. But fund experts say investors can profit by steering toward funds that avoid the pitfalls of size. Some managers, for example, simply shut off the spigot. Dennis Bryan, the manager of the $1.2 billion FPA Capital, has kept that fund shuttered since 2004, and says he will close a fund whenever he feels that flows have become so strong that they are "threatening future returns." Many sharp fund investors say they keep an eye on these funds until they reopen, then join in. Another strategy: watching for funds that, despite good performance numbers, haven't grown especially big -- because, for example, they aren't part of many 401(k) plans.
3. When Is Cut-Rate Good? When It's Your Broker
It's hard to believe there was ever a time when Americans paid real money for the privilege of purchasing or selling even a few shares of stock. But 20-plus years ago, the most basic trades could easily set clients back a Benjamin or more. (Not to mention the fact that such trades involved picking up a phone and talking to a real, live person.) Then came the revolution: The behind-the-scenes growth of increasingly sophisticated and fast trading technology took much of the human element out of the transaction -- and drove down the price. The past two decades have seen the full flowering of the discount-brokerage movement originally spearheaded by Charles Schwab and his namesake firm. Even the discounters didn't used to be cheap by today's standards -- at Schwab in 1991, the average price of a trade was about $76. Starting in the late 1990s, however, the rise of the Internet, along with the competition it fostered, drove commissions down to the rock-bottom lows we see today.
The change created plenty of ripples in a brokerage industry that's now responsible for safeguarding more than $14 trillion in assets. Indeed, ironically enough, the biggest discount brokers now look a lot like their full-service competitors did a decade ago -- and vice versa. As discounters like Schwab, Fidelity and E-Trade grabbed more market share, they forced full-service brokers to rethink their game, with some offering fee-based accounts that package wealth-management services with unlimited trading. Full-service players started to feature discount platforms as well: Bank of America Merrill Lynch, for example, has Merrill Edge, which charges as little as $6.95 a trade.
Meanwhile, the ever-dropping commissions prompted many discounters to offer their own banking and financial-planning services, especially since there's only so much money to be made off of stock trades that can cost less than a venti something at Starbucks. At these brokers, investors can now inquire about opening a checking account -- or making inheritance plans. "The future is about being more holistic in terms of services," says Charles Goldman, a former Schwab executive who's a cofounder of Advizent, a marketing service for financial professionals.
From one angle, it's a parable of how free-market capitalism is supposed to work. Customers clamor for lower prices -- and actually get them. Now, anyone can play the stock market and enjoy a range of services as well, for a lot less than they would have 20 years ago. But the discount revolution does have a dark side. Low prices have prompted many less-than-qualified investors to become active traders, buying stocks the way some fashionistas buy designer shoes -- and study after study has shown that active traders fare worse than investors with less-itchy trigger fingers. On a broader scale, some experts say, cheap stock trading makes it easier to see stock investing as a form of speculation rather than part of a sober financial plan. Joshua Brown, a New York financial adviser, says he's seen one too many traders who learned that lesson the hard way. "If you give some investors too much rope, they'll hang themselves," he says.
4. Look It up in the Index
Two decades ago, active stock pickers ruled Wall Street, and some were a little smug about their prowess. They were particularly dismissive of index funds, which seek to own all the stocks in a given category, without researching them. Without the genius of a fund manager behind them, the pros sneered, investors might as well rely on a monkey to throw darts at the stock page.
Well, a lot more of us are living on the Planet of the Apes -- and liking it. In the early 1990s, index funds held roughly $1 out of every $50 in the stock-fund universe. Today it's $1 out of every four. What happened? The most obvious answer, experts say, is that investors wised up to the way investment costs dent active funds' returns. On average, actively managed stock mutual funds charge investors fees of 0.9 percent a year -- $93 per $10,000 invested. To earn their keep, stock pickers need to beat the market by at least this amount, year in and year out. It may not sound like much, but over the past five years, fewer than three in 10 funds have managed the feat.
Changes on Wall Street have also played a big role. Back in the day, many actively managed mutual funds were mostly sold by stockbrokers who earned hefty commissions to peddle the hottest names. Facing complaints from customers and bad publicity in, ahem, the personal-finance press, these so-called sales loads eventually got a bad name. And these days many brokers charge a flat fee rather than commissions, which can make them far happier to recommend index funds. Fee-based advising "made passive viable," says Tyler Cloherty, senior analyst at brokerage researcher Cerulli Associates.
Index funds themselves have changed with the times, too. In 1993 the now defunct American Stock Exchange, looking to gin up trading volume, created a new index-tracking investment that could be traded any time of day, like a stock. Thus was born the exchange-traded fund industry, which now holds more than $1.2 trillion in investor assets. Today there are more than a thousand such ETFs covering dozens of narrow corners of the stock and bond markets. The Standard & Poor's 500-tracking SPDR alone holds about $100 billion.
Of course, there's been some deep irony accompanying the popularity of ETFs and indexing. Experts have long urged individual investors to use these products to build cheap, broadly diversified portfolios of stocks they are willing to stick with for the long haul. But some ETFs charge fees amounting to more than $100 per $10,000 invested, higher than the average actively managed fund; about one in 10 index funds charges more than $200. Moreover, some critics point out that many investors essentially flip ETFs in rapid-fire market-timing strategies -- running up the kinds of trading costs and other expenses that can make an active fund pricey. "It certainly wasn't the original aim, that's for sure," says Westwood, N.J., financial adviser Mark Willoughby.
5. The World Is Your Oyster
Twenty years ago, Mark Mobius visited a tire company in Sri Lanka that he was considering as an investment. It quickly became clear that the manager of the Templeton Emerging Markets fund -- a pioneer in its field -- was the first Western investor to knock on the company's door. "They didn't have any clue as to what I wanted, why I was there," he recalls.
These days, wherever Mobius travels, he's greeted with glossy brochures -- in English -- and an eager investor relations executive who knows exactly why he's there. And although they seldom literally follow in his footsteps, many American investors and consumers are on the same path. Just about everything -- petroleum stocks, purses, pomegranate juice -- can be bought anywhere, by anyone with an Internet connection (that's more than 2 billion people, or about a third of the world's population). Nobody shopped online until the mid-1990s, of course, but in 2011, e-commerce generated $194.3 billion in the U.S. alone.
Shoppers of all kinds look abroad for the same reasons: better deals and wider selection. For investors, there's also the lure of diversification. While economies have become more interconnected in recent years, it still pays not to put all your investing eggs into one geographic basket, the pros say: Owning foreign stocks and bonds can help investors ride out a rough patch in U.S. markets. And investors have clearly grown more comfortable with investing abroad: 321 mutual funds now have international in their name, compared with 92 in 1992, according to Morningstar, and assets in these funds have grown more than tenfold during that time.
Technology, of course, has fueled much of this change. Back in the early 1990s, foreign-stock investors used to request company annual reports via the post office -- it might as well have been carrier pigeon -- and then wait weeks for them to arrive. Today, investors everywhere can download company filings with the click of a mouse. Thanks in part to new scrutiny from all these eyeballs, accounting conventions have become more standardized across countries, says Bill Fries, co portfolio manager of the $25 billion Thornburg International Value fund. As a result, many financial advisers no longer hesitate to suggest that younger investors hold as much as 50 percent of their stock portfolios in foreign companies.
For all the changes over the past 20 years, certain principles haven't budged. John Arnhold, chief investment officer of internationally focused First Eagle Investment Management, says his managers still look for companies whose stocks trade for less than what they estimate the business is worth. (By that metric, they're finding some of the best opportunities in Japan.) And some markets remain riskier than others. Other investors see the most opportunity, and the most volatility, in the so-called frontier markets of Africa and other developing nations. Mobius, for example, likes resource-rich Nigeria and Kenya. Access to reliable information in those markets still has room for improvement, he says, but even so, those countries are more advanced than China or Sri Lanka 20 years ago. Investing there, Mobius says, "was quite an adventure."
6. Be Contrarian -- and Win
Investment pros are a lot like anyone else. They want to pick stocks, bonds and other assets that will soar in value -- but when it comes right down to it, they also want to keep their jobs. And the sure way to hang on to your salary in the investing world, many industry insiders say in low voices, is to just go with the herd. It's why the performance of many mutual funds won't look much different from the index they benchmark themselves against -- even though many actively managed funds cost investors much more than an index fund. Famed economist John Maynard Keynes once said, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally." Translated into the investing world: You won't lose your job if you lose half your fund's money on tech stocks, as long as your fellow pros lose their shirts on tech stocks too.
But ordinary people have different incentives -- and they can often reap big rewards by going out on an investing limb. Many of the most patient and successful long-term investors say that putting money in the sector or asset that everyone else is avoiding often pays off over the long haul. Apple's stock price looked rotten to many "experts" in 2002, when it was $7 a share. But some people noticed that it had $4 billion in net cash and no debt -- a sign that it was poised to survive tough times and grow. (Apple's share price is about $600 now.) Jeremy Grantham, a famous contrarian who's made his living zigging when everyone else zagged, sent a note to readers and clients, dubbed "Reinvesting When Terrified," that advocated jumping headfirst into stocks. The date: March 2009. Most investors stayed terrified -- indeed, over the subsequent three years, they pulled more than $200 billion out of U.S. stocks -- but the markets, of course, rebounded with a vengeance.
Being contrarian can save investors lots of money as well. Back in 1999, the herd was buying large stocks, not noticing that they were trading, as a group, at 34 times expected profits, their highest price/earnings ratios ever and double their long-term average. Someone ignoring the crowd would have avoided stocks -- or bet against them, and made a killing over the next two years, as the dot-com bubble burst.
The good news, even for those who have missed out on gold's 1999 bottom ($250 an ounce then; $1,600 now), the monster run in bonds or the stock market's 2009 lows, is that we'll all most likely have another chance over the next 20 years. "Markets are shockingly inefficient," Grantham says, which means the next ridiculously low price for a good investment is just a few headlines away. His advice: Wait for a time when things are out of whack, then push a lot of chips in.
7. The Graying of the Boomers Will Change the World
Steve Jobs was a baby boomer. So are George Clooney, Oprah and the Boss. So are President Obama, Hillary Clinton and Mitt Romney. There's a case to be made, in fact, that the past 20 years represented an apogee for the generation of Americans born between 1946 and 1964 -- as they reached their peak earning years while taking hold of the levers of corporate, political and cultural power. But for all the clout this generation has wielded in its prime, the way boomers collectively exit their prime could have an even bigger impact on the country. Boomers are plowing into their retirement years, ready or (very often) not. And how they cope with the challenges of the transition will shape our economy for decades to come. After all, at 78 million strong, boomers are a demographic T. Rex whose every move has a ground-shaking impact.
During the stock market booms of the 1990s and the mid-2000s, many boomers undoubtedly thought their retirement would meld the best of the Buffetts (Warren and Jimmy), combining fat portfolios with tropical ease. But since the 2008 crash, many are coping with shriveled savings and diminished expectations. According to a recent MetLife survey, only half feel that their retirement savings are on track. While most are willing to keep working to close their financial gaps, that choice isn't always in their hands. Disability rates for Americans in late middle age are worsening, sabotaging many workers' earning power just when they need it most, says demographer Neil Howe, founder of consulting firm LifeCourse Associates.
Multiply these personal challenges by, well, 78 million, and their importance becomes obvious. Already, the cost of Social Security and Medicare benefits for boomers is the angry elephant in the room in any debate over government spending. But there's plenty of silver lining, too. More empty nesters, whether in need of a job or just hankering to be their own boss, are hanging out a shingle -- giving the economy a jolt. Indeed, 45- to 64-year-olds composed 48 percent of all new entrepreneurs in 2011. "Contrary to the popular opinion," says Scott Shane, economics professor at Case Western Reserve University, entrepreneurship "increases as people get older." And so, studies say, does happiness: The AARP Thriving index, which measures emotional well-being, suggests that people's happiness reaches its lowest point at ages 51 to 55 and starts peaking after 65.
8. Digital Is for Real
The 2008 financial crisis and its aftermath have made the dot-com crash look almost quaint -- the way an early version of The Sims might look to a Call of Duty junkie. The recession that coincided with that stock market slide was mild compared with the one we're now recovering from. Back then, unemployment "peaked" at 6.3 percent, a number that seems enviably low today. So it's easy to forget how disillusioning the tech bubble seemed to many investors at the time. A generation of 401(k) jockeys, many managing their own retirement accounts and portfolios for the first time, felt like kings as they watched Amazon.com break the $100 mark -- only to endure the chill when it fell below $8. The tech-heavy Nasdaq index (tech heavy being '90s-speak for sexy) took a similar trajectory, and bearish market pros were quick to offer withering hindsight: Investors had bought tech stocks at prices that could only be justified by enormous earnings growth, they said, but many of the companies had no earnings at all.
What only a savvy few knew at the time was that enthusiasm about the digital world wasn't entirely misplaced: It was just early. Computer hardware and processing power got cheaper and more powerful, digital communications grew faster and more reliable, and eventually, the profits followed. Amazon.com got its groove back, and an entire e-commerce universe took shape. Mobile phones shrank and grew sleeker, even as they became minicomputers that perform tasks once reserved for hangar-size Univacs. In 2000 just 44 percent of Americans were online; today 78 percent are, and vast swaths of the developing world aspire to the same access. And the information technology sector is so well established as to be almost stodgy, accounting for almost 20 percent of the value of the firms in the S&P 500.
But as experts note, and as just about anybody with a job knows, the digital-driven world is anything but settled and secure. Better communication and information-processing technology have created losers as well as winners in all kinds of industries, says John Hagel, co-chairman of consulting firm Deloitte's tech-oriented Center for the Edge: "The biggest change is the intensification of the competition." Customers and business partners demand more of every company -- and in private life, Americans face more pressure to make more and faster decisions about their spending and their financial security. The good news, says Anindya Ghose, co-director of the Center for Digital Economy Research at the NYU Stern School of Business, is that savvy citizens are already using the digital era's overwhelming supply of data to their benefit -- finding better deals, unearthing smarter investments and holding companies accountable. And mobile Internet platforms and social-media outlets are just adding more tools to the consumer kit. In the never-ending, high-stakes negotiation between companies and consumers, says Ghose, "each of these will be game changers."