Dave and Steve mark one year of socially distanced podcasts by discussing the average 401k balance for Americans broken down by age. Find out how you compare to the rest of the country. After that they wade in to the age old discussion of growth versus value investing. Growth stocks have dominated value for most of the last decade. Will this outperformance continue or is it time for value to shine?
Steve Killiany:
All right. Welcome. [inaudible 00:00:59] now, episode number 76. I am Steve Killiany and I’ve got Dave Murray here with me.
Dave Murray:
Hi there.
Steve Killiany:
How are you doing Dave?
Dave Murray:
Good, good. Just hanging out.
Steve Killiany:
Yeah.
Dave Murray:
[inaudible 00:01:15]. COVID pod, as we see the light at the end of the tunnel.Steve Killiany:
Yeah. I talked to this client the other day and I said, “Oh, can you do a meeting next Wednesday?” And him and his wife both retired. So he said, “Yeah, I can do a meeting, whatever blend Wed-nez-day you want to do.” So like, what does that mean? He’s like, “Well, they all just blend together, Wednesday, Thursday, blurs day, Friday.” So yeah, it feels like that. But like you said, hopefully we do see a light at the end of the tunnel and hopefully be actually meeting people and seeing people eventually. That’s why maybe… It’s here. I don’t know.
Dave Murray:
I’m very positive about it. I mean, that’s just the way I feel. I feel like they’re going to crank these vaccines out. It certainly looks like… We’re recording this on February 25th, but it looks like March is going to be exponentially more vaccines for people who want them. And many of these people say by the time we roll around the mid April, if you want a vaccine, you’re going to get a vaccine. And quite frankly by that time, you’re meeting people. If you and I are in a room by then, you have a vaccine and your second dose or whatever and I have… And the numbers are really low. Why wouldn’t we just get together again and run things as we used to?
Steve Killiany:
Yep. Now, we’ve talked about it. I’ll be interested, I’ll be curious to see what percentage of people, basically have gotten used to the virtual meetings now. And we have some clients where we meet them at [Tysons 00:03:01] and they’re driving up from Southern Maryland or Stafford or something like that. I’d be curious to see some of those people who just say, “You know what, virtual meeting is fine. We’ve been doing them for years with clients all across the country.” So I imagine there’ll be some people who just don’t want to commute to one of our offices and virtual meetings will become the future, but…
Dave Murray:
Yeah, what’s interesting is with our clients who we’ve had, they’ve been our clients for years and years, there is definitely something for them and us, and you and I, it’s so nice to see them. We’ve already put together a plan. We’re following the plan [inaudible 00:03:46]. We’re doing our job, but a lot of it is catching up and seeing people who we like, that’s been years. So I foresee a lot of that. If our client… If they want to, they don’t have to, but if they want to, we will see them again in person. I’ve noticed what’s odd is for the people we’ve met that are potential new clients and have become new clients. I think the virtual, which I would think would be the opposite. They want to see you in person and get to know you. I find doing the virtual has been good because we’re all focusing on the work, focusing on something new, focusing on information and just looking at the computer screen and not having a distraction, has made that focus, I think clearer.
Steve Killiany:
Yeah, and I think there’s something to be said for that as opposed to reaching across the table and saying, “Hey, I’m looking at this page. Look at this page.” Just having it on the computer in front of you is helpful at times.
Steve Killiany:
Okay. So that’s not what we wanted to talk about today. Dave, you had one thing that you brought up and then I thought I had one exchange of some emails with a client that I thought would make a good topic. So let’s tackle your thing first, which was a CNBC article, looking at the average amount that Americans have in their 401k balances. And I didn’t need to click on the article and read it to know that it was going to be some pretty low numbers. I don’t know if that was your thought [crosstalk 00:05:21].
Dave Murray:
It’s my thought because you and I both do the same thing. We read these things and know there’s information inside and out and look at it all the time. But for a lot of people, it’s new information. Maybe I’ll set this one up. You’re always the setup guy. I’m used [inaudible 00:05:36].
Steve Killiany:
Okay.
Dave Murray:
I’m going to do the setup today.
Steve Killiany:
Okay.
Dave Murray:
A rare changing of the setup, but-
Steve Killiany:
[inaudible 00:05:43] back and relax.Dave Murray:
Right. See, you get to do what I normally do, which is let you carry the load. But anyways, so when you look at these numbers, they don’t matter when you’re young. Yeah. Age 20 to 29, the average 401k balance is 15,000. That’s not even surprising. And I think for a lot of kids, if that’s your average balance, especially early 20s, that’s pretty good. You’ve had a job. You put some money away. You at least gotten started. Retirement is something you’re thinking about a little bit.
Dave Murray:
Average, 30 to 39 is $50,800. So, you know with everything else going on in your life when you’re 30 to 39, mostly married or many married and children and stuff like that, and you have years to go and let’s say, you’re continuing to contribute. Not that bad, not the end of the world. Do you need a lot more? Of course, you do, but okay. I think the numbers are interesting as you get older, these average numbers, 40 to 49, 120,800. Well, you know what? At a 120,800, that’s good. You’re over a hundred thousand in your 401k. So you got a long ways to go and you need to start even 20 years out, get going on that with what things are going to cost.
Dave Murray:
I find the numbers to be… Then to me, they become disturbing with an [asteRISK 00:07:07] After that. Yeah. I’ll tell you what the asteRISK is. So age 50 to 59, the average 401k balance is 203, 600, which is good that you have money saved for retirement, but not nearly enough to live on for 20 or 30 years in retirement but still more time to grow it. As people are working longer and longer. I found age 60 to 69 to be the number one disturbing number, the average 401k balance between ages 60 to 69 in the United States of America is $229,100.
Steve Killiany:
Yeah. And I mean, with every other age group that you’ve mentioned and yeah as you’ve pointed out, yeah, okay, you don’t quite have as much as you need, but you still have that benefit of time. When you get into that 60 to 69, there is no benefit of time. I mean, you’re coming up on retirement, voluntary or not. So that’s to me why that number is so disturbing.
Dave Murray:
Right. With the asteRisk. My asteRISK is for the most part, these are more people who might be listening to this podcast and they’re from the DC area. And they might happen to have a good pension. Let’s say you’re a federal employee. And you can combine your pension with your social security. And you can say a lot of my living expenses, based on what I spend are covered by the combination of my pension. Let’s say my spouse’s pension and both our social securities or whatever your situation is, that guaranteed income is equal to or more than what I’m spending every month. Now that 229,000 saved for retirement is crazy. It doesn’t need to be used to support me every… And maybe I’d like to have more that’s enough because that’s there for other expenses, emergencies, whatever. And I still have a long lifetime to grow it. That would be the caveat. That would be the asteRISK.
Steve Killiany:
If it’s just being used to supplement your retirement income, fine. But if it’s being used to fund your retirement, you don’t have a pension, that’s really trouble. And I should say that whenever I read these numbers and these national averages, I mentally, in my head think, “Well, okay, we live in the DC area, obviously it’s a more expensive, more affluent area to live. So if they say, average across the country is 229,000, maybe to get an average in the DC area, you might need to double, or maybe even something like that, 500,000 instead of 230,000, that’s probably… I don’t know. What do you think Dave, is that probably a more average number in this area?
Dave Murray:
I would think that’s a more average number, but really the discussion is about there’s a number and for the purpose of this discussion, I’m 65 years old or 67, whatever I’m about to collect social security. I’m used to living on a hundred thousand dollars a year. I’m used to spending $8,000 a month. Let’s chase that, I’m used to spending $8,000 a month. Now I’m collecting social security and that’s paying me… How much a month.
Steve Killiany:
Let’s say 3000, we’ll be generous.
Dave Murray:
Okay. That’s paying me 3000. I’m used to spending 8,000 and I have 230,000 in my 401k. You and I know, and many of our listeners and clients know that I could take about 4% off my 229,000 a year. And that’s going to last 25 years maybe. At what percent of 229,000 is approximately $9,000 a year? So that 9,000 added to my social security… 9,000 a year, which isn’t even a thousand a month added to my 3000 isn’t quite there with my 8,000 expenses. As a matter of fact, it’s not even close. And that’s why to people who run capital, retirement strategies, that number in general, [inaudible 00:11:39].
Steve Killiany:
And let me just add on the other statistic this article had in here, and I get this question a lot from younger people. Not that we work with a ton of younger people, but a lot of times it’s clients who say, “Hey, my kid just started. She’s working a job. They’re trying to save into their 401k. How much should they be saving?” And they’ve got in this article here, statistics and it’s basically the younger age ranges, save about 7% all the way up to maybe 12% of their salary.
Steve Killiany:
I often tell people when they say, “How much should I be saving?” If you’re saving 15% of your pay and you’re on the younger side, I think you’re in phenomenal shape. Now that’s an arbitrary number, just when I’ve kind of done some calculations but if you can do 15% and you can have that as a goal to strive towards. You know what, if you wind up doing 12%, you’re probably still going to be in good shape. But if you could do 15 and you can do that consistently from when you start working all through your career, I think you’re going to be in pretty good shape for the longterm
Dave Murray:
Right. And many people, by the time they get to us, they’ve been doing that their entire working life. And these clients are in very, very good shape. By the time they come to us and our job, instead of having them have the ability to survive retirement, it becomes more about enhancing their net worth and working on tax strategies with their investments and all that stuff. Enhanced versus survival. So we have survival clients and we have enhanced clients. And I would say what you just said, there is the character makeup of an enhanced client.
Steve Killiany:
Yep. All right, Dave, let’s shift gears to what I wanted to discuss and I’m going to title this… when I titled the podcast, I’m going to title this as the growth versus value debate. But I think that the discussion goes even beyond this. But what I mean by this, when I say a growth versus value debate, when you talk about investing in stocks, there are what you call style characteristics to different types of stocks. And the real easy examples are growth stocks. And nowadays, most people think of these big technology names like Facebook, Amazon, and Google, and things like that, that are growing by leaps and bounds every year, depending on the company, they might be growing by 30 or 40% every year. In fact, I just saw something today that Twitter said that they want to double their revenue in the next two years.
Dave Murray:
Yes. I saw that.
Steve Killiany:
That is big growth. Contrast that with more value oriented stocks and you can define value a bunch of different ways, but a lot people think of value oriented stocks, more as your typical dividend paying stocks. So maybe this is a utility company. Maybe it’s a bank or maybe it’s a real estate trust or something like that. And if you think about a utility company or a consumer goods company, my classic example, I always use Procter & Gamble. And I say Procter & Gamble, they make soap, they make diapers, they make hand cleaners, they make all that stuff. The chances of them doubling revenue like Twitter in the next two years, I just think it’s pretty unlikely that Procter & Gamble sells twice as many diapers two years from now than they’re selling.
Dave Murray:
It’s possible?
Steve Killiany:
Unlikely though.
Dave Murray:
But volatility is different also.
Steve Killiany:
The volatility is different-
Dave Murray:
Because there’s… They’re not going to kick Donald Trump off of consumer products like diapers or baby powder.
Steve Killiany:
Right.
Dave Murray:
Even if they did it wouldn’t affect anything.
Steve Killiany:
Yeah. So, okay. So those are two very broad investment styles and what you’ve seen over the past 10 years or so, with a few exceptions in there, is that growth has dominated over value. So growth oriented stocks, like the technology stocks that I mentioned in there has really done much, much better that value oriented stocks. Now, when we go back and we take a look at stock market history, going back more than 10 years, we go back 80 or 90 years, we see that over the longterm, the value oriented stocks have performed a little bit better. When it comes down to actually investing, we like to hold a balance of these types of stocks.
Steve Killiany:
We like to hold some growth, some value, we might overweight or underweight within there, but we’re not saying, “You know what, forget about all value. We’re just going all growth or vice versa. Forget about all growth. We’re going all value.” But what’s happened the past couple of years is growth has dominated so much. And let me just give you some numbers to show you what I mean. In 2020 large cap us growth stocks were up 38 and a half percent. Large cap us value stocks, Dave, they were up 2.8%.
Dave Murray:
It’s a huge chasm.
Steve Killiany:
That’s a huge chasm there. That’s one of the biggest differentials there that you’ve seen in a long time. And even when you expand that out over the past decade, I think it’s something like I don’t have the number in front of me, but I think it’s something like a 3 or 4% advantage for growth over value. So of course a year like last year leads to a lot of people to say, “Why the heck am I owning these value oriented stocks? Why don’t I put everything in growth?” And this is invariably something when we’re going over performance with clients and we’re looking at the components of their portfolio and we’re pointing out, we’re saying, “Okay, see this fund here. It was up 38%, whatever it was up, this is your growth oriented fund. It’s got all those big growth names who we talked about”
Steve Killiany:
And then we look at you more balanced or even value oriented fund. We say, “Okay, this one’s not nearly as much.” The natural question, and sometimes it’s a half joke, but I can tell if there’s a little bit of truth behind the joke, is that people say, “But, why don’t we just put everything into the one that was up 38%?” And if we step back and we look at this subjectively, we say, “Well, I probably don’t expect it to be up 38% every single year.” We know long-term averages in the stock market and they’re nowhere near 38% every year. Because frankly, if that happened, all of the sudden, those investments would be worth tremendous amounts of money. And it’s not possible there. So this discussion or this question that this client had was, should we have more money in these growth oriented stocks versus value-oriented stocks?
Steve Killiany:
And I’m going to even take this a step further and say small cap value oriented stocks. So this is of course another thing where you can look at, well how to grow through versus value. You can look at how to large cap do versus small cap. And once again, large cap growth dominated everything else. So I had a long detailed email back and forth with this guy, but I pointed out one particular statistic that I thought was worth sharing. It was interesting here. So if you’re familiar with investing in stocks, you’ve heard of the term, the P/E ratio before. And P/E ratio stands for the price-to-earnings ratio. So very simply if the stock you’re looking at has earnings of $1 a share, and it’s trading at a 20 P/E ratio, that stock is going to trade it around $20 a share, okay.
Steve Killiany:
And obviously the company, they could increase their earnings. And if they increase their earnings to $2 a share, well, the share price could go up to $40 and you would still have a P/E ratio of a 20 P/E. Now, not to get way too into the weeds here, but let’s imagine that earnings didn’t change at all, but the price of that stock went up. So earnings stayed pretty much flat, but now the price of the stock has gone up to 30 or $40. That’s what we call multiple expansion. Basically, people are willing to pay a higher price for the same amount of earnings. And that’s what we’ve seen a lot of in large cap growth. And if you look right now at where large cap growth is trading, it’s trading at about 170% of the average P/E ratio that we normally see. Now, if you listen to that, you might say, Steve, should we sell all of our large cap growth?
Steve Killiany:
Just a couple minutes ago, you had me convinced that we should put all our money in large cap growth. Now you convinced me that I should sell all my large cap growth because it’s at 170%, basically saying it’s overvalued there. And I’m going to go back to my point of no, we like to hold a balanced mix of these things because we don’t know, will this continue for a year or two years or three years? Because it’s certainly happened in the past or will we see a correction and it goes back down and we see a big decline in large cap growth.
Dave Murray:
Yeah. Well, I’ll tell you what. At the end of the day, it still boils down to a couple of basic Warren Buffet like investing principles. If you’re trying to figure this thing out, one is this is the basic for everybody, buy low and sell high. Why would you buy high by over-weighting in growth knowing this information? It’s one thing to keep balance. It’s one thing what you just said, but to overweight, get rid of the value [inaudible 00:22:51] growth. So I’m buying high [inaudible 00:22:54] breaking the basic rule. Then the other scenario is this, small cap value companies that are smaller that have R value. In other words, they’re well-run, they’re going to be good over the long haul. They make sense, especially in a batch, like a mutual fund. What do I project for these that are undervalued as far as their stock price?
Dave Murray:
How does that project out for the next 10 to 15 years. When I’m in [inaudible 00:23:22], I’m buying low right now? So when you look at the long-term… That’s all we do with our clients is looking at the long haul of this. You don’t want to be in a position where you could look backward in hindsight and say, “Oh, in hindsight, I never should have just gone all in on growth because I should have just realized blah, blah, blah.” Well, hindsight doesn’t work when this is your job.
Steve Killiany:
Yeah.
Dave Murray:
We’re not in the hindsight business or else we’re in the not in business, business, you and me. So that’s where… Almost this boils down to why I think good financial advisors are important for people because you need to be able to guide the long… Diversification sounds great when you’re at a cocktail party.
Dave Murray:
I did a diversified portfolio. And that’s the way to be because when one thing is up, another thing’s down and vice versa. In the long run, you grow it better. It’s a no brainer. Yeah. It’s a no brainer. If your brain was a computer, not an emotional mess. And when it comes to money, most people’s brains, even with your own money… Remember it’s easier for us, we’re dealing with other people’s money, easier to be less emotional. When it’s your own money, you’re emotional. And when it’s retirement planning and you’re not working anymore, rightfully so, you’re more emotional. But boy, this isn’t an emotional issue.
Steve Killiany:
Well, and I’ll tell you what makes this so hard, is you can be your investment thesis and your investment approach can be 100% correct for the longterm, but it can be dead wrong in the short term. You know what I mean? So you can…
Dave Murray:
Do I know what you mean? Every day we deal with the client, virtually every day we talk to one of our clients, whether they’re a new perspective client or one we’ve had for a long time. They will naturally… This isn’t their job. I mean, no problem. They’ll talk to us with the mindset of what’s happened in the last year.
Steve Killiany:
Yep.
Dave Murray:
And that’s fine. And that’s okay. That’s like me when I’ve gone to a doctor, I talk to the doctor… Now I apologize, 9,000 times so I go there [crosstalk 00:25:43]. I do what I don’t want done to me in finance. I look on the internet. I know it’s just the internet. Here’s what I feel. Here’s what I think, you tell me, am I right, wrong, off? Whatever.
Dave Murray:
So I think it’s okay. It’s always okay to have your opinion. And in our job, it’s important. And it’s critically important that clients have talked to us and say what they feel, not just what we want to hear. But yeah, would you agree with me that most of our clients and most people in general look over the last six months to a year and that’s the…
Steve Killiany:
Of course. I mean, [crosstalk 00:26:22], you and I have to resist doing that personally because that’s what the financial media throws in front of you. That’s what investment firms want to throw in front of you and-
Dave Murray:
And it’s human nature. It’s human nature.
Steve Killiany:
Yeah. So, but I mean, it is hard to look at things and say, “Gosh, I was wrong for this last 12 months.” Without the knowledge of knowing, you know what, if we project out for the next five or 10 years, I’m going to wind up being right. But right now it feels like I’m wrong. And I should do something. It always feels better to do something than to not do something. So we as human beings, we have this bias towards action and-
Dave Murray:
[crosstalk 00:27:09]. Over the course of our firm and our career, we have done things. We have changed course you and I. We’ve made decisions but not those kinds of decisions. Had it been more micro decisions, not macro things like what we’re discussing [crosstalk 00:27:26].Steve Killiany:
You could certainly take the approach and frankly we have been a little over-weighted towards value or towards growth over the past couple of years. And that’s worked out nicely because that appeared to be where most of the innovation was coming from, but to take that to an extreme and say, “I’m betting the farm on it. I’m not going to go there. You shouldn’t go there.” A much more balanced, measured approach makes sense.
Dave Murray:
Well, you know what’s going to happen. This is a prediction and this prediction will come true because I… At least I think it will come through for me. I plan on still living longer even though I’m much older than you.
Steve Killiany:
Okay.
Dave Murray:
At some point, we will have a discussion with a client or prospective client, and they’ll say, “why in the world are we in growth? Can we put more in value?”
Steve Killiany:
Yep. Oh, believe me. I mean, when I started-
Dave Murray:
I don’t know when that’s coming, but its coming.
Steve Killiany:
I started in the business in the year 2002. And obviously that was very early on in my career there. But I remember having discussions with people and say, “Why would I ever invest in technology stocks and growth stocks? Those just got crushed.” Because you remember, we came off the 90s, growth and technology was all the rage. And then for three years in a row, growth and technology got crushed. And I remember having a discussion with a guy and he said, “I’m never touching technology stocks again. They’re terrible.” So…
Dave Murray:
Steve. Let’s put this in perspective. Do you know how long it took the Nasdaq to get back to its high of like the year 2000 or 1999? I mean you’re-
Steve Killiany:
I heard it was… I think it was 13 years. Right?
Dave Murray:
I believe [crosstalk 00:29:18].
Steve Killiany:
Am I wrong?
Dave Murray:
14 years. You’re right.
Steve Killiany:
Okay. Something like that.
Dave Murray:
[inaudible 00:29:23] two months but March COVID crack.Steve Killiany:
Yeah.
Dave Murray:
[inaudible 00:29:27] four weeks. It wasn’t like Brexit one evening, it was 14 years. Look where the NASDAQ is now.Steve Killiany:
Yep. All right. I think that’s all we got for today. Thanks so much for listening. We’ll check in again till next month.
Steve Killiany:
(silence)
