Finance Stories So Important You Can't Think About Anything Else

"There are questions so important that is it hard to think about anything else."

--Glen Weyl, 2007 Princeton valedictorian address

A few readers have noted that I've made a habit of writing about the abysmal track record of financial pundits. Guilty as charged. But I write about it because I think it's one of the most important financial stories of our time.

Think about it. A pundit bombastically predicts that a market crash is coming. You sell your stocks and sit in cash. Meanwhile, the market gains 20%. The pundit will never be held accountable -- he's still on TV making predictions -- while you are 20% poorer than you should be. The decision to sell was yours alone, but the relationship between you and the pundit is skewed; both of you gain when he's right, but only you lose when he's wrong.

Over the last two weeks, investors have pored over analysts' predictions for 2013. But as a Bloomberg headline summarizes nicely, "Almost All of Wall Street Got 2012 Market Calls Wrong."

It's hard to write too much about bad predictions because, as Glen Weyl might say, it's so important that it's hard to think about anything else.

However, there are a couple of other finance stories that should move to the top of your list. They're so important that they can't be written about too much.

One is that the majority of Americans aren't prepared for retirement.

According to Social Security's actuary tables, a 65-year-old female can now expect to live another 19.9 years. That's almost double the remaining life expectancy of half a century ago. And according to Nielsen Claritas, Americans aged 65 have a median net worth of just $232,000. Meanwhile, Fidelity Investments says the average 65-year-old couple retiring this year will need $240,000 just to cover medical billsduring retirement.

Of all Americans, ConvergEx Group says: "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away."

Forget earnings reports, fiscal cliffs, interest rates, or oil prices; the most important financial story of most Americans' lives will be their lack of personal savings and the challenges it will pose as they attempt to retire. It's so important that it should be hard to think about anything else.

Or how about the fact that the majority of professional money-managers underperform their benchmark index?

According to the Vanguard Group, "When removing the effects of survivorship bias, the percentage of funds that underperformed the market [was] 62% for the 10-year period, 67% for the 15-year period, and 72% for the 20-year period."

As Bloomberg reports:

More than 65 percent of mutual funds benchmarked to the S&P 500 trailed the gauge in 2012, according to data compiled by Bloomberg. The 50 stocks in the S&P 500 with the lowest analyst ratings at the end of 2011 posted an average return of 23 percent, outperforming the index by 7 percentage points, the data show.

The question of "What manager can I make the most money with?" is becoming, "Who will lose the least of my money relative to an index fund?"

There has been a shift away from active management and toward indexing in recent years, but investors still hold about $11 trillion in actively managed funds. And according to IBM, global money managers overcharge investors by $300 billion a year for failing to deliver returns above a benchmark index. Consider: Warren Buffett has made $230 billion for himself and his investors over the last 50 years, while the majority of money managers cost their investors that much every nine months.

If you invest with professional money-managers, this, too, is so important that it should be hard to think about anything else.

Most financial news is irrelevant -- even harmful -- to your financial health. But some stories are so momentous that they can't be written about enough.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.


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