I worked in the financial services industry for over 40 years, the last fifteen of which as a Financial Advisor for Merrill Lynch in Winston-Salem, NC. My novel, Deadly Portfolio, builds a story around Matthew Wirth, a retiring financial advisor who, in preparing for his own retirement, is turning his practice over to junior partner, Morrie Clay. The following interview, while fictional in its presentation, expresses opinions based upon my experience. I have been retired since the end of 2007 and I am no longer a licensed investment advisor. –John J. Hohn, Author
Reporter: Mr. Wirth, you are just one month into your retirement. Do you have any special thoughts on the transition into retirement, especially the financial side of things?
Wirth: It’s like shoving off in a boat. You need to work things out so that your savings and investments are good for the duration. There is no stopping to replenish anywhere along the way. Not unless you want to become a greeter at Wal-Mart or take up some job that a senior can handle.
Reporter: That doesn’t sound like anything you have in mind at this point in your life.
Wirth: No. I hope not. My wife and I still have income from Social Security and dividend and interest income from our investments. Also, I’m not opposed to harvesting profits from time to time. The tax rate on capital gains is often less than the rate a couple pays in income tax. Too many people, especially retirees, hold on to their stocks too long, well past their peaks and into decline. The selling decision is more difficult decision than the buying decision. If a stock has done well, we think that it has more room to run. But every high from high someday declines. The same research that goes into buying a stock or a fund goes into selling it. Research, decide, invest. It’s that simple.
Reporter: You make it sound so cut and dried.
Wirth: Investing is simple. Human beings are complex. There is a point of diminishing returns to research. Usually three good reasons are all anyone needs to make a decision. Anything less usually does not help people feel as sure as they wanted to be.
Reporter: So you are a buy-and-hold investor?
Wirth: Absolutely. These guys, the fast draw artists, glued to their laptops waiting for a stock to break one way or the other are too much for me. Some trading platforms can be downloaded to smaller devices like cell phones, and a trader can buy or a sell at any time from any place. I wouldn’t want to live that way. I don’t believe in holding a stock come hell or high water either. People who retire with a lot of their company’s stock often hold too much of their old employer’s stock, and they can not be convinced to sell it. I some cases, like Merrill Lynch, Wachovia, Bank of America, Krispy Kreme—too mention a few—they paid terribly for their loyalty.
Reporter: Let’s say that I am a buy-and-hold investor. Do I watch my stock portfolio? How closely should I watch the market?
Wirth: Great question. I’d say never. Never watch the market. Watch the economy. Human beings control the market. Humans are motivated by fear and greed. The economy is a much more reliable predictor of how well investments will perform. I like to compare it to horse racing, although I don’t put investing in the same category as gambling. Look at the economy and find the lanes that are most likely to produce a fast track. In a recession like the one we have been experiencing, defensive stocks—staples, health care, medical care—have provided the better performance. That will change. When it does, find a few good horses in the other lanes. You’ll do fine.
Reporter: What about bonds? You haven’t mentioned them.
Wirth: Good old, boring old bonds. Retirees favor them too much. They think that bonds are the untouchables and will never lose money. But they do. Think back to the inflation that this country experienced in the last couple of years of the Carter Administration. Money market funds—cash—were earning 16 to 19 percent at the time because the government lost control. We had a war to pay for. We had Johnson’s “Great Society” to pay for. We were in debt for both so we just let money get real cheap. We paid the debt of at rate of about 60 cents on the dollar. Bondholders took a bath. The interest they were getting paid didn’t keep up. When their bonds matured, they had no buying power left in them. It’s another whole story—maybe another interview on some other day. That’s why I am concerned about the spending and the huge national debt today. We keep bringing up short-term solutions, but none will work. Letting inflation take over will look too easy in the long run and people living on fixed income will bear the brunt.
Reporter: Could that happen again? That kind of inflation?
Wirth: It’s happening all of the time. The only question is how severe is it. When I graduated form college in 1961, anyone landing a trainee position with a major company felt great at being offered $5,200 a year for a start. A dollar went a lot farther in those days, of course. I bought a house for $18,000 in 1969. In 1978, it sold for $82,000. The same house. Nothing much had been done to it. A good automobile in 1964 might have cost $4,800. Today, the sticker price is probably $48,000. We aren’t getting anywhere with all of this. We are just putting bigger numbers on everything and going down the road as if nothing is wrong.
Reporter: But deflation can be trouble also. Isn’t that right?
Wirth: Of course. Nobody wants to see goods and services come to market and get sold at a price less than what it cost to produce. We have an inflation mentality. We think if prices go up a little, then everything is fine. The dollar, after all, is no longer on the gold standard. Its value is based on an unmanaged consensus. Because of the large numbers involved, the value of the dollar is determined by what goods and services are selling for. It’s circular. Goods and services are priced to sell at the prevailing value of the dollar and the value of the dollar is determined by the prices that goods and services command in the market.
Reporter: Somehow that just doesn’t sound right.
Wirth: I’ve oversimplified it. The value of currencies against the dollar on the international market is also an influence. At one time, if you or I lost confidence in the value of the dollar, we could fall back on the reality that the dollar was backed by gold and silver, both actual precious metals, the scarcity of which determines their value. We can’t do that today. Nothing is backing the dollar except the almost universally held belief that it is worth something. That is one very simple reason why we have inflation, even at a very low rate. We need it. We can’t run the economy without it.
Reporter: That’s scary. You’re sure that you haven’t missed something in the way you presented it?
Wirth: I would love to be wrong about it. But there it is. My wife takes a small plastic card to the grocery store and checks out with a week of grub using her card and comes home. Once a month, the Social Security sends some numbers to my banking account that can be converted to paper dollars if I choose, but I don’t. Instead, I let the bank that issued the card to my wife tap into my checking account and draw out the numbers that are equal to everything she has bought with the piece of plastic.
The economy is an act of faith. It is like death and the hereafter. It is better that people don’t think about it and just go along every day because everything seems to work out—at least most of the time.
Reporter: Earlier you said that we were bringing up the wrong short-term solutions. What did you mean by that?
Wirth: If you were deeply in debt, would you want to reduce your income? That is what some are asking the government to do in calling for reduced taxes. If you were deeply in debt, would you spend more? That makes even less sense, but again politicians and economists are telling us to do just that. The mathematics of increased spending will not stand up. There’s no way that a dollar spent by government will earn back a dollar in taxes. It won’t work. We are not using common sense.
Reporter: You mix a little philosophy in with your views of money and investing, don’t you?
Wirth: Beware anyone who doesn’t.
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