I’m a firm believer in using humor to explain material that can be as dense and dry as some topics in personal finance can be. On that note, John Oliver hit it out of the park last weekend in his coverage of retirement funds. Not only was he entertaining, he was right…to a point.
A little knowledge can be dangerous, however. Before you adjust your financial strategy based on HBO’s “Last Week Tonight,” remember that any comedic news show presents truths mixed with jokes in a way that only scratches the surface of complex issues. Let’s break down his advice.
“Start saving now. In fact, start saving 10 years ago.” Oliver says we should save for retirement if we can, acknowledging that there are some people just unable to do so. But, there are some exceptions to this rule. For example, if you are not receiving an employer match for each extra dollar you save for retirement and you have credit card debt, then you should pay off that credit card debt first because the interest you will pay on the credit card debt is higher than any plausible return you can expect to receive from your retirement savings. Perhaps some people with credit card debt fall in the category of people who Oliver says cannot save for retirement, but not all.
Additionally, wise investments in your own human capital can yield higher returns than a retirement plan. So, if you have an opportunity to earn a marketable degree that can plausibly increase your future earnings, then do it – even if you have to borrow money. (Of course, if that school is as promising to your future as, say, Elf School, I think we can all agree in putting the money toward your retirement instead).
“Invest in low-cost index funds, then leave it alone.” Investing in low-cost index funds is good advice. So is diversifying across stocks and bonds around the world, and there is no one index fund that does that to my knowledge. You need to invest in multiple index funds to achieve this level of diversification (e.g., the Vanguard Total Stock Market Index Fund, the Vanguard Total International Index Fund, the Vanguard Total Bond Index Fund, and the Vanguard Total International Bond Index Fund). If you only invested in one of these funds, you could be worse off than if you invested in an actively managed fund(s) diversified in stocks and bonds around the world. Indeed, many index funds only track a particular sector of the U.S. economy, and investors who limit themselves to these funds are critically underdiversified.
“If you have an advisor, ask if they are a fiduciary.” Yes, yes, yes. Always ask if your financial advisor, financial analyst, financial consultant, financial planner, wealth manager, etc. is a fiduciary. You want someone working for you, not for themselves.
“As you get older, gradually shift your investments from stocks to bonds.” Reallocating your portfolio away from stocks and toward bonds as you age is the strategy of the phenomenally popular class of mutual funds called target date or life cycle funds. The idea is that stocks become less risky the longer your investment horizon. So, given that you can expect a higher return with stocks than bonds, you should invest more in stocks when you are younger and have a longer investment horizon. There is only one problem with this idea: There is good reason to believe that it is wrong as the Nobel Prize-winning economist Paul Samuelson demonstrated in 1969. Other than that, it’s fabulous.
To be fair, many other top scholars believe that investing more in bonds as you age makes sense but the practicality of their advice depends, for example, on your ability to work longer when you are older to make up for disappointing equity returns. And you may not have that option.
“Try to keep your fees – like your milk – under 1%.” Yes, keep them under 1% – way under 1%. For domestic stock and bond index funds, it’s reasonable to expect your fees to be under 10 basis points, or 1/10 percent. For international funds, 20 basis points, or 1/5% is a reasonable expectation.
While all of these points are valid, the devil’s in the details. Of course, I don’t expect John Oliver or any other comedic newscaster to be responsible for the details. Again, I applaud “Last Week Tonight” for taking a very boring topic, making it engaging, and elevating it to a broader discussion. As Oliver says at one point himself, “I am not saying that all of this is not complicated. We spent weeks trying to understand our own 401K plan.”
Remember, however, that commentary like this is a great starting point. I hope you watch the show, think about your own situation, and figure out the details that work for you. After determining your strategy, you can go back to Googling teacup pigs in teacups.
Allan Eberhart is a professor of finance at Georgetown University’s McDonough School of Business where he also is the director of the Master of Science in Finance Program.