John Bogle on fixing our retirement system

I'm not a Boglehead, but I vacillate between thinking that no one can beat the market (and so you should put all your money in index funds) and thinking that there are star fund managers who of course can beat the market (and so you should invest in actively managed funds). It all depends on which of my funds is doing better at that particular time, I guess. I have taken an interest in Jack Bogle's ideas to fix our retirement system (I leave it up to the reader to decide if the system is broken and needs fixing).

The financial system, he charges, is too far skewed toward Wall Street and money management firms. At the same time, he says, individual investors have far too much freedom to make ruinous decisions with their retirement accounts.

So how would he fix things? Bogle proposes the creation of a federal retirement board to simplify and clarify the retirement-savings process. The board would oversee a new kind of defined-contribution account to replace the salad bowl of options—401(k), IRA, Roth IRA, Roth 401(k), 403(b)—that currently confront and confound investors. It would also monitor savers' investment choices to help them determine just how much risk they can tolerate and would emphasize low-fee mutual funds over pricier ones. Just as important, Bogle is urging Washington to require retirement plan providers—and all money managers, for that matter—to meet basic client protection standards. He wants fuller and clearer disclosures of all potential conflicts of interest and any other information that might affect investing decisions.

What I like about this: I agree that fees are too high and some of our retirement system is designed to enrich the fund managers. There is way too little accountability for poor performance from the fund managers.

What I don't like about this: I may be reading this wrong, but it seems like this proposed federal board would determine what we could invest our retirement funds in. I worry that the choices would be so conservative that it would be impossible to get the returns needed for a nice retirement. I don't mind someone overseeing investment suitability and pointing out investment risks, but it should be up to the individual to say if he or she wants to take those risks to get bigger rewards.

Sadly, the article says that Mr. Bogle has failing health. More of his investing philosophies can be found here.

Financial crisis numbers

I was reading a story about how innovation will lead us out of the current financial crisis (the online version has some differences from the print version). What really interested me was not the praise given to innovation, which is the central point of the article, but some of the facts and figures the author gave about the cause of the crisis.

He lays the blame for the crisis not on any one group, but on just about everyone involved; American consumers, the U.S. government, politicians, banks, rating agencies and regulators. And he says that allowing Lehman Brothers to collapse is what really made things awful. But on to the numbers.

From 1930 to 1997, U.S. house prices grew by .7% annually. From 1998 to 2006, they rose at an 8% clip.

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driving mortgage equity withdrawals to over 10% of disposable income versus 3% a decade earlier and the equity content of the U.S. housing stock down from nearly 70% in 1965 to 43% - the lowest level since records have been kept.

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These lower-quality mortgages grew from less than 10% to 40% of originations; interest only or negative amortization loans that didn't require near-term principal repayment were introduced and grew to around 25% of originations; and over 75% of these mortgages were not held by the lenders but rather were packaged into securities and sold to others.

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Consumer balance sheets swelled with indebtedness as debt service payments reached nearly 15% of disposable income - as in the 1930s.

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we experienced after 2002 the first economic recovery since the war in which real median incomes went down.

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The decline in the prices of stocks and values of homes robbed American households of nearly $11 trillion in net worth - which equals the combined output of Germany, Japan and the U.K. - and perhaps $30 trillion globally. Since consumers usually spend about 5% of their net worth a year, the negative "wealth effect" likely caused them to reduce spending by about $550 billion domestically and perhaps $1.5 trillion globally.