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March 24, 2006
Why Doesn't Everyone Do It?
I get this question a lot: "If the Snider Investment Method does what you say it does, why doesn't everyone do it?" Just think about that question for a second. Name me something that everyone does.
Seat belts save lives - why doesn't everyone wear them? We know giving up cigarettes will increase your life expectancy - why doesn't everyone do it? Indexing has beat active portfolio management over time - why do the vast majority of Americans still employ active investment strategies? Each year, there is one mutual fund that outperforms all others - why doesn't everyone own it?
My father always said, "Different strokes for different folks. That's why there's Cokes and Dr. Peppers." (He often talks in that folksy East Texas sort of way.) But you get the point. The question isn't why doesn't everyone do it. It's why don't more people do it?
So why don't more people do it? First, let's define "it". Are we talking about investing for income or the Snider Method specifically? Because let's face it. It is hard to get people to do mainstream income investing let alone something that is unconventional like the Snider Investment Method.
Modern portfolio theory, which is the basis for most conventional investment ideology, says that you should spread you portfolio over various non-correlated asset classes to spread risk. In its simplest form, this would include stocks, bonds and cash equivalents. Asset allocation models spread your money over those asset classes in different percentages depending on what stage of life you are in and your tolerance for risk. The classic example is the 60/40 portfolio - 60% stocks and 40% bonds that is the rule of thumb for people as they are nearing retirement.
I speak to groups of investors several times each month. The groups I speak to are pretty evenly split among recent retirees, near retirees, and those that are still a ways off from retirement. I have been doing this every month for years. As part of my program, I ask for a show of hands - "How many of you have EVER owned a bond?" Typically, about 20% of the hands in the room go up. "How many of you have EVER owned a bond fund?" A few more hands, but not many.
Why are people so fixated on the accumulation model? Some of it is historical. Some of it is structural and has to do with the financial services industry itself. And the other piece is behavioral. Let's look at all three.
Income investing is all about two things - creating an income stream while protecting principal. Strangely enough, these have not been top of mind for the majority of investors until 2001. Think about that for a minute.
Our parents and grandparents lived in a world where a reasonable standard of living was guaranteed by a combination of Social Security and employer pensions. Not since before the Great Depression did Americans have to provide their own retirement income. And I would point out that before the Great Depression, there really wasn't any such thing as retirement as we know it today. People worked and then they died. Historically, all invested capital has essentially been risk capital.
If we look through the long lens of time at the change that has taken place, that scenario has shifted in what is a microscopically short space of time. We have gone from having a guaranteed retirement income to having to fund 100% of a 30 year retirement ourselves, in just 20 years. Income and risk management, in this new scenario, become paramount. Yet, our awareness of this fact is lagging far beyond the shift in reality that has taken place. Why?
A vast infrastructure has been built over the last century that supports the high risk accumulation model. Wall Street spends $19 billion on marketing each year. How much of that is around risk management and creating income? Almost none. What products pay brokers and financial advisors the highest commissions? Those with the highest risk? Compensation systems have been built around gathering assets, not distributing them.
To encourage you to move from accumulation to income is a very expensive proposition for most advisors. Unless, their firm was built that way from the start, chances are, they are going to find it very difficult to put your best interests ahead of their own.
The final issue is behavioral. One of the strongest concepts in psychology and sociology is social proof. Social proof says, in the absence of certainty, humans will look around them and do what everyone else is doing. In other words, we are instinctively herd animals. The more uncertainty, the more likely we are to seek out social proof.
Social proof creates a momentum that is very hard to break. If everyone else is taking a lot of risk and continues to invest for growth, it is pretty hard to break away from the perceived safety of that herd. It takes enough early adapters to create critical mass in the new way of doing things before the mainstream will join in.
We are not there yet. But we will be. I predict, in 20 years, income and risk management will be the dominant approach. In all fairness, I also have to tell you that is not a very bold prediction - although it may sound bold now.
Industry groups, like the Retirement Income Industry Association, are being formed. Magazines are being created, like Boomer Market Advisor, that focus on the issues of retirement income. Big players, like Fidelity and Merrill Lynch have teams who are working on new ways to help their investors make the transition. Financial engineers are working feverishly on new products that allow higher sustainable maximum rates of withdrawal and products that are not denominated in dollars but rather in future streams of income.
Which bring us back to the Snider Investment Method. The Snider Investment Method is out on the forefront of this movement. It is one such product engineered to manage risk and provide consistent income, over long periods of time, independent of market movements. Those who use it today are still among the early adopters. It requires them to break from the perceived safety of the herd, which is very hard for most of us to do.
I'll make another prediction. One day, in the not too distant future, we will look back at the Snider Investment Method and it will appear quaint, even antiquated - like placing ads in the newspaper to buy and sell options contracts appears today. And when that day comes, I will be thankful. It will mean that we, as an industry, and a society, have solved a pressing problem for millions of Americans.
Until then, I can only say, you have to evaluate it for yourself. I can make that easy for you to do. But only you can know if the Snider Investment Method is right for your temperament and objectives.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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